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Before you buy a small cap stock, invest 15 minutes of your time to speak with company's CEO and CFO to establish their credibility.
A substantial part of a small cap stock's valuation is attributed to the perception of its senior management. Therefore I encourage investors to talk to the CEO of the small cap company to consider: Can I trust the CEO? Is the CEO forthcoming with information? Does the CEO appear to answer questions openly and honestly? Has the CEO executed against what he/she has communicated in the past? These are all good questions to help determine the CEO's credibility before you make the investment.
An investor's discussion with a CEO who comes across as promoting the company's stock price presents risk. While small cap CEOs must be dynamic enough to generate interest, their job is not to talk about valuation and promote the stock. The CEO's job is to deliver earnings and to articulate results and future strategy transparently and in a timely manner. Promotion does not generate sustainable value.
If the small cap CEO seems too promotional, then, also talk to the CFO, and consider: Has the CFO earned a professional accounting designation and past work experience to command the respect from his/her CEO boss? Does the CFO emphasize the importance of their company managing costs and generating positive cash flow and earnings? Is the CFO more risk-adverse?
After speaking to both the CEO and CFO of a small cap company, an investor should feel a balance between optimism and realism. To that point, too much talk by management of stock price blurs this balance and makes them less credible.
Aggressive talk by the small cap CEO may lead to higher short-term stock price appreciation, but it also increases volatility and the risk of disappointment, resulting in stock valuation suffering in the long-term. |
