Taking The Extra Steps at Trade Show Produces “Knowledge” To Assess Stock

By Norman F. Klopp, Jr., CFA, Partner

ORLANDO, FL — I was one of 104,922 people who passed through the doors of the Orange County Convention Center here to attend the 2005 International Builders’ Show — the world’s largest and most comprehensive building industry exposition.

Over 1.5 million square feet of floor space dis-played the latest advances in construction and remodeling materials. The show was, in many ways, a homeowner’s wonderland of ideas and I was duly impressed.

My reason for coming here, though, was to conduct some “real-world” research into an investment opportunity for our clients.

Analysts’ meeting

I was invited here, along with other investment analysts, by a major manufacturer and supplier of products used by home builders and remodeling contractors. It’s a corporation I had visited many times and its stock was one I believed should be included in client portfolios —but only when the price and timing were right.

I wanted to hear what the company would report to analysts, and the questions posed by other analysts. Group meetings like this are usually interesting, but they usually don’t provide the knowledge—or catalyst—I need to make an investment decision on behalf of our clients. So I mapped-out a plan to obtain the information I needed by “working” this event.

“Private” breakfast

On the morning of the presentation to the analysts, I showed up at the convention center very early. This enabled me to have breakfast with two members of the company’s “acquisition department.”

They informed me that, in 2004, the corporation initiated a plan to grow through new product development and market share gains, rather that its previous strategy of growing through acquisitions. This strategic shift suggested the corporation would focus on growth of cash flow and real cash flow returns—factors we at Midwest Investment Management consider very important.

During this same conversation, I also learned about a relatively new corporate strategy to develop new products. Henceforth, “higher-risk” new products would be developed with “venture funding” provided from corporate headquarters to the divisions.

Although this meeting was informal, my early arrival enabled me to learn that this company was not just setting a new strategy, it was changing its culture of growth with specific strategies and incentives!

Formal presentation

Then, I attended the company’s presentation to analysts, which lasted until noon.

But, my work wasn’t over. So at the luncheon, I sat with the corporation’s chief executive officer. Then, I “stayed around” after lunch, so I could talk to him alone. Soon, the company’s president and chief financial officer joined us and a detailed conversation about their new corporate strategies ensued.

Checking competitors

When our discussion ended, I felt a need to “confirm” what I had been told. So I waded through the crowds on the show floor and spent the next several hours inspecting exhibits of the company’s competitors—about six in all—to see what products were being introduced or “showcased.” This form of “reconnaissance” is often used by marketing professionals to determine what their competitors are doing.

One more discussion

I capped-off the day by having a long discussion with one of the company’s marketing representatives, who provided me with yet another perspective on the company’s competitive position and the new focus on accelerated product development. Competitors, he said, were already taking notice.

That evening, I concluded that the stock of this corporation should be added to client portfolios—the share price and timing were, in fact, right.

Early the next morning, I called our offices in Cleveland and discussed my conclusions with my Partners who began to buy the stock for client portfolios that day.

Prudent decision-making

What’s the lesson here? Had I simply “attended” the corporation’s formal presentation to analysts, I would have obtained only information.

But, by “working” the show, with specific plans in mind, I gained knowledge. And knowledge leads to decisions...the kind we implement every day in our mission to help our clients reach their long-term investment goals.

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Norm Klopp’s investment knowledge and discipline has produced enviable results. If you are not a Midwest Investment Management Client, contact Norm to learn the advantages a managed account relationship can offer you. He can be reached at (216) 830-1135 or nfk@mimllc.com