Friday, June 23, 2006

Devil in the Details!

I attended the Wall Street Reporter small-cap investment conference this week. Except for a no-show key-note speaker, the event went off without a hitch!

Like most conferences featuring smaller companies, the presentations were delivered in a direct and plainspoken manner. It is one of the characteristics of the small cap sector that draws my interest in the first place.

Unfortunately, for all their sincerity the executives of small cap companies frequently fail to deliver on the details that investors need to make an intelligent investment decision. Small cap presentations are typically long on the “coolness” of their product line or the “unique” technology that backs it up and very short on the information that investors use to select a stock for a long position.

A the conference I saw one CEO stumped by a question about the breakdown in his company’s customer base even after his lengthy description of the demographic characteristics of the target markets. His explanation that he and his colleagues were working on getting that data was not really that impressive. It seemed to me that even if the company had not yet compiled detailed data, any operation targeting certain demographic groups and relying on targeted marketing campaigns would have some idea of the contribution one group on another is making to revenue streams. The non-answer brought into question whether the management team has enough information to make intelligent media purchases or whether they have something to hide. Even a ball park answer would have cast the CEO in a better light as a man in command of his business.

The next big blooper – at least in my view – came from the CEO of a very small software company. He had just spent a half hour in the formal presentation bragging about the impressive profitability of his company. Yet after retiring to the break-out session, he was unable (or unwilling) to answer a question about cash flows from operations in the previous fiscal year. His answer that he did not know suggested he thought it an unimportant detail and that he should not be bothered with such a question. At the very least I think a CEO running a company with less than $8.0 million in annual revenue should know what cash flow from operations was in the last fiscal year. At that size level cash flows have to be critical no matter how profitable a company has become. If I ran a company that size, I would know cash flows from operations to the dollar.

I appreciate that senior executives have a considerable load on their shoulders. In the small company the CEO and CFO are often called upon to do everything from negotiating acquisitions and financing packages to landing new customers to installing office equipment. Remembering those nuisance dollars and cents questions asked by analysts may seem unimportant by comparison. Nonetheless, every CEO and CFO at the conference was there with his or her hat in hand hoping to woo new interest in their stocks. How far would they get if they went to a prospective customer asking for an order if they approached it with such a lackadaisical manner? “Oh no Mr. Customer, I really do not know what this product does and we have never really tested its performance, but we certainly would like you to buy it.”

My advice to small-cap senior officers: pay attention to the details - the devil is in there!

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