General Musings

This section is where you'll find my thoughts on life from the eyes of an entrepreneur.  The biggest challenge is balancing the success and obligations that success brings as the more successful one becomes, it seems the more obligations they have to the world.  Feel free to comment as you follow my journey and general musings regarding that journey. 


General Musings on Life & Entreprenuership

Investment Criteria to Grow (My) Personal Wealth

(08/21/2011) Mark A. Cenicola

Mark-Presenting-TEC.jpgWith all of the regulations, insider trading scandals and recessions, it doesn't seem like it would be much fun to run a publicly traded company.  The fact is that it's very difficult to run a successful public company.  If it was easy, then everyone would be doing it and raking in millions in the sale of stock.  Of course, if you are one of the hyped Internet consumer companies, you can make millions by staying private, but that's the exception, not the rule.

I started investing in stocks when I was 13 years old.  Making your money work for you instead of you working for your money was an amazing concept. The lure of buying a stock at a low price and the possibility of it skyrocketing to new highs was also quite exciting.  

As a matter of fact, I had the opportunity (or misfortune depending on your view) of investing in a penny stock nobody heard about, then having it shoot to the moon.  Turns out, it was a sham and the stock came right back down before I ever sold it.  All of this happened within a matter of days.

After a few years of investing and not a whole lot of money made, I became to realize that the only people that really become rich were people who were running these public companies.  

It's no secret that taking a company public usually provides a windfall for the founders and early insiders (investors).  Starting a company from scratch and seeing it all the way through to IPO has to be one of the greatest mechanisms for building incredible wealth in this country (USA).

Ever since I bought my first stock, I've been hankering to run a public company because of that very reason.  I'm still working toward that goal, regardless of the challenges in the market today.  The good news is that I have plenty of time to make that happen and don't need to rush before some IPO window closes.  Opportunities will continue to open and close in the future so a set timetable isn't an absolute requirement.

I've continued to invest in public companies since the first time I bought stocks still knowing that the best way to make a fortune is to be in control of those companies.  The other way is to have a very stringent strategy with unwavering discipline.  Like most amateur investors, I've made plenty of mistakes and my investment strategy has been all over the place throughout the years.  Stringent, strategy, unwavering and discipline weren't words in my vocabulary when it came to my investment criteria. 

As I've gotten older, I've become a smarter investor.  That hasn't stopped me from making silly investment mistakes that plague many of the people who put money into the market though.  Buying too high, selling too low, being impatient, buying companies on hype instead of fundamentals and looking for a quick flip are just some of the common mistakes and barriers to growing personal wealth.

Thankfully, I've identified an investing strategy for myself that should reap great personal rewards.  The first challenge is finding companies that meet these criteria and the second, yet most difficult challenge, is not making exceptions to this criteria.

My Investment Criteria (in no particular order)

Growing Revenues
This is really simple.  If a company isn't growing it's dying.  No matter how profitable a company may be, it's hard to continuing growing revenues.  Cutbacks, downsizing staff and other maneuvers can temporarily increase a company's profit, but they do nothing to grow a company.  Stocks in companies increase in value because of growth, it's really that simple.

Cash on Hand to Support Growth
There are plenty of companies that are growing revenues. Major mistakes are made investing in companies that are growing revenues, but don't have enough cash on hand to continue that growth and see it through to profitability.  Companies can sacrifice profitability in the short term for growth, but without enough cash, they can't take advantage of opportunities, shift markets when technology changes and could grow themselves into bankruptcy.

Growing Industry
There are companies growing both revenue and profits in dying industries.  From the outside, it looks like these are good investments.  However, If the industry in which a company is entrenched, isn't seeing growth, then at some point that company will cease to grow. 

No Stock Buybacks Announced
There is a perception that companies who buyback their stock will increase the value of that stock.  There are many arguments to why stock buybacks are good including the fact that there are fewer shares outstanding which places a premium on each share, earnings per share are increased, providing a lower PE (price to earnings ratio) and perception is that the company is making an investment in themselves.  

The reality of the situation is that Stock Buybacks Mean Companies Have No Better Plan for Shareholder's Money.  They've given up on growth and the only way to provide shareholder value is to give it back to them.

Small Strategic Acquisitions
Everybody loves when a huge merger or acquisition is announced.  The market gets excited, executives feel like they are winning, investment bankers make a ton of money, the acquired company's stock shoots up in value, etc.  The reality is that rarely do large acquisitions ever work well.  There are simply too many issues such as integration challenges because of large cultural differences.  

Companies who acquire to grow market share within their own industry are bad acquisitions as well.  Companies that can't grow organically mean they aren't really growing.  Growing via acquisition alone is not a growth strategy and usually done in industries that are consolidating.

Making small strategic acquisitions can provide many benefits to a growing company.  It can provide them with complementary offerings to support their primary offering or provide resources such as talent and technology that can help grow market share.  At the same time, small, digestible acquisitions usually won't distract management from their primary business.

Positive Gross Margins
This one goes without saying.  If the primary product or service that you are selling costs more to produce than for what you can sell it, game over.  A company doesn't have to be profitable to be a good growth investment, but the gross margins have to be positive.  Efficiencies in other areas can be gained with growth.  Growth with negative gross margins only accelerates how much money a company will loose and only a matter of time before it's in the bankruptcy heap.

Other Criteria
There are certainly other criteria and considerations when investing in companies.  This list isn't meant to be complete nor is it fool-proof.  Other things like management experience, involvement of original founders, product offering, customer service, etc. are very important.  

Should you know of public companies meeting the above, feel free to let me know.

I'm applying this same investment criteria to my own company,  We have these characteristics and as long as we do, I know that we are moving in the right direction.  The notion of building a company that matches this investment criteria is confirming that we are pursuing a proper growth strategy that should position us well to take it to the next level.

Mark A. Cenicola September 23, 2011 ~ 11:36 AM
Maybe not w/ Meg Whitman becoming CEO
HP certainly has a number of challenges ahead of itself before it can turnaround and grow. However, the decision to pick Meg Whitman as the new CEO doesn't give me much confidence that they can pull off a turnaround. It seems HP is just recycling leadership with those past their prime. If HP was going to change CEO's, they needed to bring in someone with a big vision and fresh thinking. This choice isn't it.
Mark A. Cenicola August 21, 2011 ~ 5:34 PM
Smart Move by HP to Exit a Dying Business
Yes, I'm commenting on my own post... There's been a lot of talk about the strategic changes that HP is making. They've made the decision to exit the PC business, which makes up almost a third of their revenues, and make a large acquisition at the same time.

However, HP may soon fit the investment criteria in this post. Here's why:

1) HP is making a good strategic decision to dump it's PC business and focus on growth industries. Doing so will free up significant resources allowing them focus on growth.

2) While the $10.3 billion acquisition of Autonomy is large by most standards, it represented less than 20% of HP's market capitalization at the time the deal was announced. HP is using cash and debt financing which they are sure to recuperate once they sell their PC business.

Because of these announcements HP's stock has dropped significantly which could mark a buying opportunity. I expect that there will be a lot of volatility in the company's stock due to a lot of unknowns including who's going to buy their PC division and what they are going to do with their Palm assets.

Previously, HP would have never been on my radar because it had too much exposure to a dying industry. With these moves the company could meet my new investment criteria. I'm going to put it on my watch list.

Former Apple executive, Jean-Louis Gassée, has just posted a blog article that summarizes what these moves mean.

One Sheet

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