Editor’s note: In the previous issue of PERSPECTIVE, Midwest Investment Management Partner Al Meszaros explained why on-site research is vital to the prudent assessment of stocks held in client portfolios. In this interview, Partner Norman F. Klopp, Jr. discusses the diligence that is required when meeting with corporate managements.

Editor: Norm, during the fourth quarter of 2003, you traveled the country to meet with senior managements of several companies whose stocks are held in client portfolios. Why are these meetings important?

Klopp: Personal visits are the most important form of investment research. Our clients’ money is invested in those companies, so our visits are of critical importance. Our visits take many forms. The challenge is to understand how to manage each form in order to gain maximum benefit.

Editor: Please describe one of your recent meetings.

Klopp: I attended an analysts’ meeting at a New York City hotel for a company that had installed a whole new management team in the previous 18 months—all of them from inside the company. I had previous exposure to them, and arrived about 45 minutes early so I could have informal discussions before the meeting with the CEO and CFO about three strategic topics I had identified in preparation for this meeting. While listening to the questions and answers during the meeting and talking with some of the major institutional analysts during the breaks, it became apparent that many analysts didn’t believe the financial projections of this new management team. However, this was a “positive.” The analysts were convinced the new managers were being very conservative in their 2004 estimates, and that the estimates would most likely be revised upward as 2004 progressed. This is not unusual for a “new” management team that wants to build credibility with the financial community. I also know it usually creates an environment for positive stock performance. When I returned to Cleveland, my Partners and I agreed to retain this stock in client portfolios, based on the growing positive perception of this management team and improving prospects for the company. As this article went to press, the stock was up about 23% since that meeting—more than triple the markets gain since that date, and up 62% in the last twelve months. Although we recently reduced the position size in each of our clients’ portfolios, we remain invested in the stock.

Editor: You’ve said “coffee breaks” at analysts’ meetings can be valuable, also.

Klopp: Those gatherings provide an opportunity to talk one-on-one with various executives. I am able to conduct brief but “pointed” conversations with a specific “mission.” During a morning break at a recent large companysponsored meeting, I asked the CEO about his succession plan—an important topic because he is only a few years from retirement. During the afternoon break I talked with one of the top executives who is a possible choice as the next CEO. My presence there, and the subsequent discussions, resulted in our firm’s decision to add to the existing position. So, even at large meetings I can obtain unique knowledge, if I have a plan for gathering information.

Editor: You also visited a long-term contact.

Klopp: That’s right. I met for three hours with a top executive at a large diversified industrial company whose stock we’ve held in client portfolios for several years. I have been calling on him for more than twenty years. He feels comfortable knowing that I won’t push hard to try to get a specific answer to a question the company will just not answer. That executive described an important strategic plan the company is implementing across all of its operating divisions. If successful, and indications are it will be, the cyclicality of each of the businesses will be reduced, increasing profit margins for each division, and slightly increasing the long-term growth rate. This is truly a formula for investment success.

Editor: Did you ask him how much the margins or growth rate would increase?

Klopp: No, because I knew he wouldn’t answer that question. It’s my job to estimate based upon what I’ve seen happen at two other industrial companies I follow when similar strategies were executed. The conclusion of our firm is that, even though the stock is up 80% in the last twelve months, we should not sell the stock, but continue to hold it in client portfolios. And, we now have a clearer idea of how to monitor the success the company is having with its strategy.

Editor: How would you summarize your many years’ experience meeting with corporate leaders?

Klopp: If done right, the insight gained can be unique. If done consistently, the value can be substantial. We continue to believe that field research provides important value-added insight to our investment decisions. It is truly one of the exciting and rewarding parts of our investment management process.

Norm Klopp’s knowledge, discipline, and diligence has produced attractive long-term results. If your portfolio is not currently benefiting from Norm’s stock-selection process, you’re invited to contact him at (216) 830-1135 or nfk@mimllc.com.