Some signs that you should double check your investment thesis on a stock:

Some signs that you should double check your investment thesis on a stock:

  1. The male senior executives wear more jewelry than your wife or girlfriend.  This should be an obvious one – if I see pinky rings, gold bracelets, or $20,000 watches, I’ve already lost interest in what a management team has to say.  I want my executives to have enough confidence in themselves that they don’t have to flaunt their success.  I want executives who think about how to improve the business, not how big their bonus is going to be next year.   
  2. Small companies that have a lot of “me-too” competitors.  In every niche market or new industry, usually three or four small cap companies will come public around the same time.  They will all experience some level of success until a larger company comes in and dominates the market with their scale and capital.  Or, the small companies will all gain fragments of market share until they stop growing because the market isn’t big enough to interest larger competitors.   Either way, it’s a lose-lose situation unless you time your entry and exit perfectly.
  3. The company is based in North Carolina.  North Carolina is a fine state and the legislators have done a great job of turning it from a furniture manufacturing state to a high tech power.  However, investors who fund companies headquartered in North Carolina often find they have invested in a soap opera, not a successful business.  Cree’s (CREE) co-founder turned out to be mentally ill brother who thought the family was trying to kill him.  Krispy Kreme’s (KKD) ex-CEO cross-owned several company franchises with his ex-wife.  AAI Pharma (AAII), which has suffered through broken merger agreements and financial restatements, has had a turnstile installed in the executive offices.  CEOs have even been replaced because of severe bouts of pneumonia. I could go on but I will spare you my dislike of investing in the Tar-Heel state. 
  4. Senior executives who openly thank Jesus for their business success.  Don’t get me wrong…but businesses are meant to make money, not be a tribute to God.  That’s what church is for. 
  5. Senior executives pay has a material impact on EPS.  My yardstick is Microsoft.  Steve Ballmer and Bill Gates each pay themselves about $900,000 a year in salary.  Let me repeat that…two of the richest men in the world pay themselves less than $1mln a year – the rest of their wealth came from options or stock ownership – in other words, from making shareholders rich, too.  If an executive thinks he deserves more salary than two of the most successful executives of the past decade, then he better have a darn good reason for it.  This is doubly true for small cap stocks where executives should be compensated with equity growth rather than cash. 
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