Why Snoop Dogg Should be a Portfolio Manager by Sara Grillo, CFA, President at Grillo Investment Management LinkedIn
What’s wrong with Wall Street’s portfolio managers? The numbers govern everything – at the expense of common sense. They just don’t keep it real…like Snoop Dogg. Ask any multi-platinum rapper what determines a business’s success or failure and s/he won’t say “DCF valuation” , “price to book ratio” or “the p/e ratio.” If Snoop Dogg were a portfolio manager, he’d base his investment decisions on the most important, and most overlooked, metric: the company’s sales.
Of all the things that happen on a daily basis at a company, selling the product or service is the most vital. It doesn’t matter how good a company is at doing anything else or how good their other numbers look if there is not a sustainable and expanding stream of income coming in the door. So I do not focus on calculations such as price to earnings ratio, as much of the rest of the Street does, or even the price to sales ratio. This data is tortured into shape by investor relations for the quarterly beauty pageant that the analysts call earnings season. When interviewing company management, here is what I would ask:
- What is the company’s competitive advantage or disadvantage for its major product, and how does that affect market share?
- What is the risk of technology replacing this product or service in the future?
- What is the win ratio for qualified opportunities?
- What are the demographic trends affecting the buyers of this product or service?
- How well do they sell versus the competition?
- How much market share do they have, and is that a gain or a loss from the past?
- How do you make sure that results follow a secular trend upwards? In other words, if the results for a quarter are short of the quota, how is that addressed.
- How large is the salesforce relative to the amount of prospects?
- How does sales collaborate with marketing?
- How are leads generated? Companies that use antiquated methods of prospecting, such as cold calling, paper mailers, etc., are fighting with one arm behind their back.
- If leads come from third parties (suppliers, companies that sell related products, etc.) how do you nurture those relationships and protect them from the competition?
- How are the salespeople compensated?
- How are they trained? Sales is typically one of the most undertaught professions. How do you ensure that your salespeople are staying in compliance with regulations and on top of industry developments?
Of all the metrics, sales figures are the least subject to distortion because they come at the top of the income statement. Two factors that may throw off the comparison, though, are seasonal factors such as weather and holidays. Let’s say that you are looking at Tiffany & Co. You would typically see higher sales during the holiday season. So an analyst looking at Tiffany stock would choose to use average inventory for the fourth quarter, instead of beginning and ending inventory, so that low inventory during the month of December doesn’t present an inaccurate comparison with other time periods. To address weather anomalies, analysts may look back over a few of the same time periods historically.
Some companies engage in accounting manipulation when they record their sales. The way revenue is recognized may distort sales numbers if the type of transaction and the uncertainty surrounding it are not suitably matched with the accounting method. For example, when buying a large ticket item such as a forklift, payment would be made in installments. There is uncertain surrounding whether or not the last payments in the series will actually be collected on time, or at all.
Models, models, and more models. Ratios, ratios, and more ratios. Most stock analysts get very caught up with the numbers when analyzing companies. The Street misses the big picture. There’s too much overanalyzing, too many models, too many ratios – and not enough common sense.
Disclaimer: This is neither an offer to sell nor the solicitation of an offer to purchase any interest in GIM or any other investments discussed. This publication is for informational purposes only; it is not intended to be a solicitation, offering, or recommendation by Grillo Investment Management, LLC of any product, security, transaction, or service. It should not in any way be interpreted as investment, financial, tax, or legal advice. All data herein was obtained from publicly available information and/or sources, internally developed data, and other sources believed to be reliable. Except as otherwise stated, GIM has not sought to independently verify information obtained from public or third party sources and makes no representations or warranties of any kind, express or implied, regarding the accuracy, completeness, or reliability of such information. Hypothetical and forward looking statements should not be taken as an indication or guarantee of any future performance, analysis, forecast, or prediction.
As of the date of publication, Sara Grillo and GIM hold no position in any stock mentioned in this article.