As equity valuations pull back and recession looms investors ought to take cover by investing in industry-leading companies led by quality management teams.
The universe of such investment opportunities can’t be identified by PE or cash flow multiples, dividend yields or the like. While valuation metrics are a decent filter (example: I would never pay 30-50x EV/Revenue for a Software company as was the case during this most recent bubble), they sometimes can be misleading. For example, the best company within a particular industry vertical often trades at a premium to the group.
Many investors do a fine job of incorporating valuation metrics into their investment due diligence process. Fewer thoroughly analyze the competitive environment and sources of competitive differentiation. Fewer still understand how to assess management teams. A management team’s revenue and profitability record only begins to tell the story. How do CEOs and COOs attract and retain the best people? How do CEOs incentivize innovation? What is the process by which CEOs keep their finger on the pulse of the company (hint: if your large cap CEO is not running Op Reviews on a quarterly basis he/she isn’t doing their job to the best of their ability). There are specific questions investors ought to ask that will yield specific answers about the quality of a particular company’s strategy and operational execution.
During my M&A days I would never recommend a deal to the Board if I was not a fan of the management team – no matter how sexy the target company’s story may have been. Reach us at firstname.lastname@example.org or email@example.com if you wish to learn more about how we may assist your investment due diligence process, particularly in the area of assessing management teams.