Now that you have a greater sense for the industry your company operates in, it’s time to finally take that deep dive into the company itself you’ve been dying for. For the company analysis, we want to not even look at financials yet, that’s for the next step. The purpose of this step is to understand the nuts and bolts of what a company is actually doing and the people running the show.
In general, we want to break down a company analysis as such:
- Understand the Products/Offerings
- Understand the Value Proposition
- Research Company Management
- Analyze Track Record
- Determine Top Competitors and Role in Industry
- Identify Red Flags
- Conclude
Before we get started, just a note on how to utilize this step. So much of this step is dependent on your ability to spend the time to research a company with the above steps. I cannot walk through step by step how to do this perfectly for every company. But this guide should show you the general steps and what to look out for.
As a final note, I have a step here called “red flags”. As you go through each step, you’re likely going to see some things pop up that make you skeptical of a company. As you find them, write them down and we can then summarize at the end.
Understand the Products/Offerings
This seems pretty straightforward on the face of it, but the first thing you absolutely have to do is understand what the company is selling to customers. This could be products, services, etc. At a bare minimum, you need to become very familiar with any products that make up more than 10% of company revenue, and ideally all products that encompass 80% of your company’s revenue.
As a second step, you also need to understand a company’s pipeline and apply the same criteria as above but for five to ten years in the future. That means you must understand, as best you can with public information, any product expected to account for greater than 10% of total revenue, and all products expected to account for 80% of company revenue.
How do you do this? My favorite sources are:
- Company Website – This is the best place to start. Generally, a company website has an entire section dedicated to their products/services. For a company selling a physical good, you can many times find brochures, product specifications, customer testimonials, etc.
- The 10k – occasionally, but not always, a company will get into extreme detail on their product offerings within a 10k. I think it is more common in early/growth stage companies that are trying to showcase their current/potential products to investors.
- Social Media – You would be surprised how much content you can find a company’s products or services on places like Reddit, YouTube, Twitter, or even investor Discord channels.
- E-Commerce Reviews – this is a bit of a weird one, but if you have a product / service that’s offered directly to customers via Amazon, etc., you can find loads of information on customer reviews, experiences, etc. Also, if you are working with a service provider, double check Yelp, Google reviews, etc. to see what people have said. This is only possible in very specific situations, but you can find some great gems here.
Once you’ve completed the above steps, you should be able to recite each of the significant products/services in your sleep, and even give a basic description to a complete stranger. If you can’t explain what company actually sells to customers in layman’s terms, you do not understand the company.
Understand the Value Proposition
This tacks onto understanding the company’s offerings, but you next need to understand what value the offerings provide to customers. This sounds sort of self-explanatory, but if a company isn’t offering anything of much value, then why should you invest in them.
Basically, every company that turns a profit is offering something of value to a customer, down to the most basic company you can think of. For example, even a company selling something simple like paper bags is driving value for customers. Grocery stores need them, they’re not going to make them themselves, right? Kroger’s not going to build paper mills all over the country. What else would people put groceries in? Not every customer brings their own bags. Plastic bags aren’t recyclable either! Plus, this company will sell us a million bags for two cents a bag, how is that even possible?!
You catch the drift of what I’m saying?
It sounds dumb, but you are going to run across companies that are doing some really moronic things to try and make money. They’re trying to develop something “revolutionary” or “industry redefining” that either doesn’t work or doesn’t actually do anything for customers. It’s all a bunch of hype and smoke and mirrors.
So, after you understand products, just take a step back and think about what value your company provides to customers. If you legitimately have trouble answering that question, that’s a huge red flag.
Research Company Management
For all of you social media stalkers out there, this should be incredibly therapeutic to you! For this step, I want you dig into as much publicly available information you can on every single C-Suite and publicly available director role you can find in the company. Since we’re dealing with microcaps, there’s a chance you’ll find some crazy stuff when researching management.
What am I looking for?
Basically, exactly what you’d think: Have they been successful in the past? Where did they work before this? Is their history just a slew of failed companies? Are they even qualified?
This can take many different forms depending on the company you’re investing in. For example, is the CEO of a tech company a sleezy salesman and not have any technology background? Was the founder of a financial services company previously sued by clients? That whole thing.
Where should you look?
First, we want to start with more basic sources. Google will be your best friend in this case. simply type the person’s name into Google and read through the following “biased” sources:
- Company website
- Other official sources with a personnel bio, etc.
You’ll find a lot of puff pieces here generally, which isn’t necessarily a bad thing. But you’ll have a lot of info telling you how great the person is. So take all of that with a grain of salt.
After that, it’s time to dig into what I would call the “deep web” sources. No not literally the deep web, but here is where we go into some of the more juicy and not always correct sources. Here we are trying to basically attempt to uncover any “dirt” on management.
My personal favorite place to start is to simply type “CEO NAME” and in separate searches add “fraud”, “SEC”, “bankruptcy”, “court”, and “fine”. You would be shocked how much you can find from that. You’ll likely find official sources like court records, news articles, etc. But you may also find other investors who have done due diligence and uncovered things for you.
For example, some random poster on a forum for a company I was researching led me to some crazy backstory about some fraudulent CEO. The CEO had been demoted to a regular director, but the person was still in the company… not great!
WARNING – METHOD NOT FOR EVERYBODY
Now, this part is likely too far for some people, but I’ll write it down anyways in case you find something that looks not right. You can typically figure out where the person lives (within reason) using public real estate data if they own a property, and also where they used to live. From there, you can figure out what US county they live in or used to live in.
After that, and again only if you’re comfortable with it, go to the country court records website and look them up. While the worst you’ll find is likely just some speeding tickets, you may find something more telling. I have personally found lawsuits from former investors, multiple bankruptcies, disputes with former employees, theft of IP, etc.
Now, a note of caution. We live in a world of public information related to the court system. It’s sometimes unfortunate for people that they have former legal matters plastered on the internet for someone to find. I am generally very forgiving, and it does pain me to see that some of these people may have had a troubled past 10-20 years ago. So I totally understand if people don’t want to go this route. I typically don’t go here unless I see some very fishy before I get here.
At the end of the day though, investors are putting up their hard-earned cash to invest in these companies. I totally understand if people want to use a completely legal route to investigate a person they are entrusting their money to. For that reason alone, you should at least consider this.
Analyze Track Record
This step involves combining each of the three above steps of understanding products, the value proposition, and management capability. For this step, we now want to look back and combine each of these factors to determine, basically, how well everything has gone so far.
If you see nothing but failed products, no growth, empty promises, not meeting goals, etc., this is likely not the company you want to be invested in. What you want to see is a steady trajectory of progress, or at least success. For example, they saw a product through internal development that is not earning revenue. Or another would be if management promised some sort of expansion, milestone, etc. that was met.
What you are trying to avoid is a company that is all hype and just spews random goals that they never meet. It happens ALL OF THE TIME. It’s the clickbait version of investing and it drives me nuts.
Determine Top Competitors and Role in Industry
I’ll keep this brief because we just had a whole section on it. But now that you have a very detailed understanding of your company, you need to place them within the industry. Are they a new entrant? A current player? How big is their market share? How are they competing with the other companies? Are they a direct competitor? A unique substitute?
I could go on and on, but you get the idea. Remember where you place your company in the industry, you’ll need to know this for later in the guide.
Identify Red Flags
Now, as you went through each of the above steps, there’s a good chance some red flags came up. They aren’t always deal breakers, but at the end of the day that is up to you.
For me personally, some common red flags that come up that make a company very difficult to invest in are:
- It’s impossible to understand what exactly a company does or what it offers to customers. Their product/services sections are generally littered with buzzwords, but no real substantive “this is what we do” statement.
- Empty promises and/or no real operations. Many times, you’ll find companies that don’t actually do anything, without any substantive prospects of doing anything either. Or even worse, you’ll find companies flat out lying about what they do, or greatly embellishing. For example, “we have 50,000 square feet of manufacturing space in a state of the art facility”. But when you google maps the location, it’s a rundown closed Kmart that the company bought and doesn’t use.
- Fraudulent CEO’s and directors. This happens quite frequently on the OTC. You’ll find CEO’s which have been sued numerous times, have tons of failed companies, and are overall very sketchy. Tread carefully here.
- Lack of information. Some companies squeak by the OTC’s rules on current information and barely say anything about what they do. Actively avoid.
I could go on and on, but you need to use this step to determine if the accumulation of red flags is too much for you. But remember, one can be enough depending on how bad it is. This is so situation dependent that I cannot give you a hard and fast rule.
That being said, any red flag that makes you uncomfortable is enough. It doesn’t matter how good other things may look. If you’re not comfortable and it’ll keep you up at night, you cannot invest. Period.
Conclusion
At this point, the pieces should start falling into place for your company. You should now have a very detailed understanding of the company, its operations, and management. You should also be able to place your company within the industry and understand its role, however minor it may be. You should also have an idea of red flags for your company, so keep those in the back of your mind if you want to continue analyzing.
Next up, you’ll be able to put some financials behind the company you’re analyzing.
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DISCLAIMER – THIS ARTICLE IS NOT FINANCIAL ADVICE AND IS INTENDED ONLY FOR EDUCATIONAL PURPOSES. I AM NOT A FINANCIAL ADVISOR. DO YOUR OWN RESEARCH.
Well said.
Thank you.