| Alan Sugden is a graduate of the Royal Naval Staff College, Greenwich, and a Sloan Fellow of the London Business School. He spent 20 years in the City as an analyst and fund manager, running the then 100m (now & pound ;850m) Schroder Recovery Fund for several years. He is a former director of Schroder Investment Management Ltd. Alan Sugden's successful collaboration with Geoffrey Holmes produced seven editions of the definitive book on financial statement analysis for investors - Interpreting Company Reports and Accounts . Books Interpreting Company Reports and Accounts , FT Prentice Hall Key questions for stock pickers -
Do you like the sector? If you don't like the sector, don't invest in it, no matter how good the management may be. Backing first class management in a declining sector is usually unrewarding. For example John Corrin led a management buy-out from ICI, paying 400,000 for a subsidiary that was losing 900,000 a year and was due for closure. Less than 5 years later they were taken over by Allied Textile for 10 million, and John Corrin became chief executive of Allied Textile. John is head and shoulders above most management but, in the following years, although Allied Textile outperformed the Textile sector easily, it lost ground against the FT - All share index. -
Is the company under the control of one person or one group of people? If so, other shareholders can be on a hiding to nothing. For example, there is a ship repairing and leisure company listed on the London Stock Exchange whose chairman has taken full advantage of his controlling position by paying himself over 1.4 million in the last 10 years. His shareholders have had only two dividends in the same period. What are the non-executive directors doing about it? You may well ask. Suffice to say that in 2000 there were two of them, each with a salary of 6,000 per annum, compared with the Chairman/Chief Executive's 140,000 plus perks. -
Is the post of Chairman and Chief Executive held by one and the same person? If so take care. Research in the early 1980s on 'Company Pathology' showed that companies in which the posts were combined had more than a 50% higher chance of going bust than other listed companies. Maxwell (who had his two sons as Joint Managing Directors) and Asil Nadir at Polly Peck are two classics, but there are plenty of others. Even if the company doesn't go bust, there's a danger of one man or woman having too much power. A recent example is Marks & Spencer which, in its unswerving loyalty to UK manufacturers, became strategically vulnerable in the rag trade. Most other retailers were increasingly sourcing from low cost countries . Marks & Spencer's Chairman was also its Chief Executive. Remember that the most important duty of a Chairman is to replace the Chief Executive if he is not up to snuff. This can be difficult if they are one and the same person. -
Are there any 'prestigious' names amongst the Non-Executive Directors? If so, don't rely on them to keep the company out of trouble. Well known non-executive directors of companies that failed included: Lord Seiff (Sock Shop), Peter Walker and Lord Rippon (Maxwell), Prince Michael of Kent (London United), Professor Roland Smith (Pavion), Larry Tindale, much respected deputy chairman of 3i (Polly Peck) and Lord Stokes (Reliant). As a very able 'company doctor' put it, when asked what he thought of having 'august' names on the Board replied: "Augustness has got nothing to do with it; it's about paying attention." -
Do you go to AGMs? Do so whenever you can; they can be very informative. At the AGM of a company that had a good long standing reputation but didn't seem to be doing too well, a retired director of a subsidiary, when asked what he thought of the Group, replied: "There are too many people wandering around with wishbones, and not enough with backbones." They can also be hilarious. One chairman, embarrassed by revelations of his extramarital affairs in a Sunday tabloid, shrewdly pre-empted criticism as he opened the meeting by saying how grateful he was to his family and his fellow directors for their loyal support "at this difficult time". The subject was then dropped. Or so we thought, until a little man in a raincoat got up and said that, on behalf of himself and other small shareholders, he would like to thank the Chairman for what he had done for the company (the share price had been doing well). Fair enough we thought. And then the little man added: "and if you want a little bit on the side, good luck to you, Sir, I say." -
If the results of a company seem too good to be true, do you believe them? You shouldn't. Some years ago the ebullient Chairman of a kitchen and bathroom manufacturer trumpeted record profits, up 25% on last year. In the same year, the chief executive of a listed house-builder was describing market conditions in the industry as " certainly the worst post-war years". A few months later the first company issued a profits warning. At least one subsidiary had been falsifying sales to meet unrealistic targets. The price tumbled. The Chairman resigned, and the company moved into ' intensive care'. -
Is the annual report designed to inform , or to impress? The latter can be a sign of trouble brewing. Look out for larger than A4 formats (Maxwell), glitzy photos with no captions, text printed on expensive glossy paper, too shiny to take a felt marker, (Parkfield, and many others). Mission statements should not impress you either. For example in 2000 RAILTRACK plastered the front cover of its annual report: "Our vision is the delivery of a safe, reliable, efficient modern railway for our customers and the nation . . We are making constant progress . . ." -
Do you keep your eyes and ears open for good investment ideas? It's well worth doing so. An elderly and rather 'County' widow we knew was out shopping one day. Noticing an attractive window display of white goods, she went in to buy a refrigerator. Inside, the shop was clean and smart, and the staff were very courteous in helping her buy a suitable fridge . When she got home, she looked at the receipt: British Home Stores. "Oh dear", she said to herself, "I never shop in places like that." Then she thought again, phoned her broker and bought some BHS shares. It proved a rewarding investment, as more and more people came to realize that BHS had improved hugely under new management. -
Do you look carefully at the price-earnings ratio ( prospective as well as historic) before buying, and do you avoid astronomical PEs? Some years ago Polaroid's P/E ratio touched 80. You must be joking? No, I'm not. A more recent example was when Japan privatized NTT (Nippon Telecomm), on a P/E of 80. Not only was it done at the highest price NTT ever reached, it was also the signal for the top of the Japanese market. -
Do you sometimes get the feeling that the management of a company is a bit 'iffey'. If so, avoid. A pair of elderly and very traditional City stockbrokers (pinstripe trousers, stiff wing collars and bowler hats) recalled the case of a prominent City figure. And very well heeled that City figure was too: house in Eaton Square, sizeable dairy farm on his estate in Hampshire. For years he prospered, but one day he was caught 'with his fingers in the till'. The precise details of his dishonesty escape me, but I do remember the comment made by one of the brokers : "We always knew he was bent; he was fined during the war for watering the milk." |
