How to identify strong management team?

Hi guys,
Has anyone come across any good philosophy/ insights on how to identify strong management teams when making investment decisions? Would love to learn your thinking and recommendations on books/thought processes.

thanks!

 

Looking at how often the management team changes in an indication. If the company has has 3 down periods and management changed 3 time, they suck. If they changed a couple or 0 people and the company got out of those slumps it's a point in their favour.

Also, depending on the industry, the background they have. I can only speak for biotech and pharma but management that has had past experience in similar companies and not just big pharma tends to do better.

 

If you have a chance to actually speak to the management team (e.g. PE/VC), then I like to ask about the challenges and low points they've faced and what they did to get through it. I've learned in business (and in life) that those who get hit hard and fall down but have the ability to get up and persevere are the rare ones with their act together.

 
Most Helpful

Some of the things I like to look for or questions to ask:

-How has their career evolved over time to get to where they are now? -What was their past track record at other companies or in other roles? -What other industries have they worked in if any others? -How good are they at forecasting and how accurate has past guidance proven to be? -What is their general attitude/tone towards sell side questions on calls? -How does their attitude or tone change after a difficult quarter? -Incentive Comp Structure? (What metrics are they paid on and how high are the hurdles) -Comp structure and levels of comp relative to peers? -Capital allocation priorities relative to peers or relative to what you perceive they should be? -Is their vision for the future more proactive or reactive? Are they leading their industry or following?

Then to check the due diligence box off you should always at least ask for a call with management, I like to save this as the absolute last step before I put a recommendation together. Usually it will depend on your size relative to their size if you're able to actually get a call with someone worth talking to. In general I get more calls directly with the CEO of small caps and I'm lucky to get an email back from IR for the extra large caps. When talking to management, always assume that they are lying to you, never truly trust a word they say. You'll get a feel for how much weight you can put on their words as you go through all of the above, but just make sure that speaking with management doesn't impair what would otherwise be objective research. As you go through your research process you should be writing down questions that you can't answer via public documents and past calls, but in addition to those more company specific questions, I've developed a list of other questions that I like to ask if I'm able to get a call. Listed some below, obviously each of them will be worded different for each situation but I listed some to give you an idea:

-What longer-term red flags or warning signs should I be watching for that would make me a seller of your stock? -What's the hurdle rate that you think about internally when making capex or M&A decisions? -Which sell side analyst do you think has the best handle on your stock? -You're trading at a premium(discount) to the market, what do you think the market is putting too much emphasis on or not appreciating? -If you didn't exist, who do you think your customers would use? -Is there a model company in your industry or a company outside your industry that you really admire? -What's the biggest challenge for the business in the near-term, and then thinking longer-term? -What do you view as your competitive advantage? -What's one mistake your competitors are making, and what can you do to capitalize on it? -What technology is going to have the most disruptive impact to the industry, and what are you doing to prepare for it?

There's more on the list but these are some of the ones that I think help evaluate the quality of management and help you see how they think about their business and what they might be getting right or missing in my opinion. These are just some of the pieces of my process, hope it is helpful. Happy to discuss or elaborate on any of the above.

 

Are there any books you would recommend? I read Outsiders, which was awesome for the capital allocation/decentralized operating structure front. Curious more on the qualitative side - assessing if they’re telling the truth/lying/asking uncomfortable question, etc.

I'm on the pursuit of happiness and I know everything that shine ain't always gonna be gold. I'll be fine once I get it
 

More of a skill you'll pick up through more experience since there's no way to tell if someone is lying to you or not until the numbers come out in some cases. As an example of a past trade that went poorly on this very premise: I was working on a small cap name and spoke with the CFO. The stock had been trading exclusively on fluctuations in its backlog given that the business was/is project construction. Guy told me on the call that they had a strong pipeline of projects that they just couldn't add to the backlog yet because of timing issues and certain hurdles that needed to be met before it could officially be added, but added that the backlog will likely exceed its prior peak once they start to add them. Well they ran their backlog down 70% from that point and the stock got absolutely crushed. I waited for some semblance of recovery and then recently exited at a loss.

Where did I go wrong/what did I miss? The guy was very vague in his answers to everything I asked him, that should've been red flag number 1. Used a lot of "should", "could", "probably"...very unwilling to commit to any of his answers. Hindsight is 20 20 right? But I should've put more weight on his tone in that he just didn't sound like someone that was excited about the future. Not that he was pessimistic, but for a stock as small as it was/is with the potential jump in backlog that he was alluding to, you would think that he would've been more upbeat.

Now the backlog recovery was only one piece of the thesis but I undoubtedly gave it more weight after speaking with the CFO and emphasized it as a possible informational edge in my pitch for us to buy. It is possible that the backlog recovers and he was not full of shit, but as of this date, it has only slightly and I really did not expect them to blow through it as fast as they did without any replacement given what he was telling me on the call. Just one example of how speaking with management can impair good fundamental research. I undoubtedly would have been quicker to exit that position had I not spoken with the CFO and been waiting for said backlog recovery to materialize.

It's really a soft skill that you'll pick up over time, the more calls you do the better you'll be able to sniff out BS from unbiased, useful information.

 

Amet earum at cupiditate sit. Ad laboriosam sed nobis explicabo. Illo temporibus consequatur velit excepturi omnis tenetur officiis. Assumenda ab architecto enim.

Et qui voluptatibus dignissimos veritatis laudantium. Ea cum velit et sed consectetur omnis culpa beatae. Aliquid sed beatae repellendus ipsa. Voluptas repellendus porro dolores qui.

Career Advancement Opportunities

March 2024 Hedge Fund

  • Point72 98.9%
  • D.E. Shaw 97.9%
  • Magnetar Capital 96.8%
  • Citadel Investment Group 95.8%
  • AQR Capital Management 94.7%

Overall Employee Satisfaction

March 2024 Hedge Fund

  • Magnetar Capital 98.9%
  • D.E. Shaw 97.8%
  • Blackstone Group 96.8%
  • Two Sigma Investments 95.7%
  • Citadel Investment Group 94.6%

Professional Growth Opportunities

March 2024 Hedge Fund

  • AQR Capital Management 99.0%
  • Point72 97.9%
  • D.E. Shaw 96.9%
  • Citadel Investment Group 95.8%
  • Magnetar Capital 94.8%

Total Avg Compensation

March 2024 Hedge Fund

  • Portfolio Manager (9) $1,648
  • Vice President (23) $474
  • Director/MD (12) $423
  • NA (6) $322
  • 3rd+ Year Associate (24) $287
  • Manager (4) $282
  • Engineer/Quant (71) $274
  • 2nd Year Associate (30) $251
  • 1st Year Associate (73) $190
  • Analysts (225) $179
  • Intern/Summer Associate (22) $131
  • Junior Trader (5) $102
  • Intern/Summer Analyst (249) $85
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Secyh62's picture
Secyh62
99.0
3
Betsy Massar's picture
Betsy Massar
99.0
4
BankonBanking's picture
BankonBanking
99.0
5
dosk17's picture
dosk17
98.9
6
DrApeman's picture
DrApeman
98.9
7
kanon's picture
kanon
98.9
8
CompBanker's picture
CompBanker
98.9
9
GameTheory's picture
GameTheory
98.9
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”