| Free Article |
Don't Invest in a Company
with Untrustworthy Management
by Dave Van Knapp, author of
SENSIBLE STOCK INVESTING:
How to Pick, Value, and Manage Stocks
and
THE TOP 40 DIVIDEND STOCKS FOR 2010:
How to Generate Wealth or Income from Dividend Stocks
April, 2007
News item, February 26, 2007:
“AES announced Monday that it plans to reschedule the release of its fourth-
quarter and full-year results because of errors in its financial statements. AES
had similar problems last year, when the company admitted material
weaknesses in its accounting systems, particularly in its foreign operations. The
company expects, as before, to restate its financial results. The company also
announced that may have a stock-option dating issue.”
In rating a company’s quality—the very first step in deciding whether it is even
a candidate for your investment dollars—management trustworthiness is a
mandatory litmus test. The Sensible Stock investor seeks unquestionable
integrity of management. Here are examples of situations that should stick a big
red flag on any company:
• Companies being sued on antitrust grounds.
• Companies that produce unsafe or harmful products and attempt to deny
or evade responsibility.
• Companies that admit lying or misleading the investing public in any way.
• Companies whose reported financials are questioned, or which have a
reputation for “aggressive accounting.”
AES falls into the last category. First, it can’t seem to get a handle on its own
numbers. For two years in a row, it has had to delay or restate its financial
results. In my book, that makes them “untrustworthy.” I don’t mean this in a
personal way. They may all be good, honest guys there at AES. They may
simply be incompetent. Their intent (whether to be honest or misleading) is not
the issue. The real issue is, can you trust their numbers? Clearly you cannot. If I
were evaluating this company for possible investment, I’d save myself some
time and toss it out as soon as I ran across this news item.
Note also that AES has a potential second problem: It may have a stock option
back-dating issue. The admission of issues with backdated options—which are
sometimes innocent but are often outright fraud—has become almost epidemic
over the last year or so. Because the practice was so widespread, perhaps it
shouldn’t be considered a trustworthiness issue.
But then again, not every company that issues stock options backdated them.
Backdating options, after all, moves money out of shareholders’ pockets and
into the pockets of management or board members. It is lying to shareholders.
If management lies about that, what other subjects might they be misleading you
on? New products? New markets? Operational improvements? How can you
know?
With what kind of company would you rather place your bet? A company
which effectively cheats its owners out of some of the profits to which they are
entitled, or one that keeps its owners’ interests--rather than management's
interests--foremost? The question answers itself.
Some indicia of untrustworthiness are easily seen in public records. Has the
company had a formal SEC investigation in the past year or two? Has it
repeatedly taken “one-time” charges year in and year out? Has it recently
restated earnings? Has its CEO or CFO resigned under questionable
circumstances?
Depending on your point of view, an entire spectrum of factors can lead you to
question a company’s integrity. For example, Microsoft has been adjudged in
court decisions to have used illegal tactics for years to preserve its monopoly in
PC operating systems. Years after the issue first came to light, it is still fighting
these charges in Europe. You may consider this proof of a lack of integrity and
refuse to invest in Microsoft for this reason alone.
For another example, consider Daimler-Chrysler: At the time of the “merger” of
Chrysler and Daimler-Benz, Jurgen Shrempp (CEO) said that there would be
equality of the companies after the merger. Shrempp later retracted these
statements, publicly acknowledged that he had misled, and appointed a German
to head Chrysler. Many of Chrysler’s executives left the company as the truth
of the situation emerged. So did a lot of investors: From early 1999 to early
2001, the stock dropped 50 percent. Now, in 2007, Chrysler is reportedly for
sale. As Dr. Phil might ask, “So, how has that worked out for you?” Evidence
of lack of integrity was there from practically the beginning.
Back to AES. Questions abound: Will AES ever be able to get a handle on its
accounting? Can any of its reported numbers be relied upon? Has the company
committed intentional fraud with its options practices? Does anybody there
know what they are doing? Does AES’ board have a clue?
With questions like these, why would anybody entrust their hard-earned money
to buying AES stock? The Sensible Stock Investor certainly should not.
with Untrustworthy Management
by Dave Van Knapp, author of
SENSIBLE STOCK INVESTING:
How to Pick, Value, and Manage Stocks
and
THE TOP 40 DIVIDEND STOCKS FOR 2010:
How to Generate Wealth or Income from Dividend Stocks
April, 2007
News item, February 26, 2007:
“AES announced Monday that it plans to reschedule the release of its fourth-
quarter and full-year results because of errors in its financial statements. AES
had similar problems last year, when the company admitted material
weaknesses in its accounting systems, particularly in its foreign operations. The
company expects, as before, to restate its financial results. The company also
announced that may have a stock-option dating issue.”
In rating a company’s quality—the very first step in deciding whether it is even
a candidate for your investment dollars—management trustworthiness is a
mandatory litmus test. The Sensible Stock investor seeks unquestionable
integrity of management. Here are examples of situations that should stick a big
red flag on any company:
• Companies being sued on antitrust grounds.
• Companies that produce unsafe or harmful products and attempt to deny
or evade responsibility.
• Companies that admit lying or misleading the investing public in any way.
• Companies whose reported financials are questioned, or which have a
reputation for “aggressive accounting.”
AES falls into the last category. First, it can’t seem to get a handle on its own
numbers. For two years in a row, it has had to delay or restate its financial
results. In my book, that makes them “untrustworthy.” I don’t mean this in a
personal way. They may all be good, honest guys there at AES. They may
simply be incompetent. Their intent (whether to be honest or misleading) is not
the issue. The real issue is, can you trust their numbers? Clearly you cannot. If I
were evaluating this company for possible investment, I’d save myself some
time and toss it out as soon as I ran across this news item.
Note also that AES has a potential second problem: It may have a stock option
back-dating issue. The admission of issues with backdated options—which are
sometimes innocent but are often outright fraud—has become almost epidemic
over the last year or so. Because the practice was so widespread, perhaps it
shouldn’t be considered a trustworthiness issue.
But then again, not every company that issues stock options backdated them.
Backdating options, after all, moves money out of shareholders’ pockets and
into the pockets of management or board members. It is lying to shareholders.
If management lies about that, what other subjects might they be misleading you
on? New products? New markets? Operational improvements? How can you
know?
With what kind of company would you rather place your bet? A company
which effectively cheats its owners out of some of the profits to which they are
entitled, or one that keeps its owners’ interests--rather than management's
interests--foremost? The question answers itself.
Some indicia of untrustworthiness are easily seen in public records. Has the
company had a formal SEC investigation in the past year or two? Has it
repeatedly taken “one-time” charges year in and year out? Has it recently
restated earnings? Has its CEO or CFO resigned under questionable
circumstances?
Depending on your point of view, an entire spectrum of factors can lead you to
question a company’s integrity. For example, Microsoft has been adjudged in
court decisions to have used illegal tactics for years to preserve its monopoly in
PC operating systems. Years after the issue first came to light, it is still fighting
these charges in Europe. You may consider this proof of a lack of integrity and
refuse to invest in Microsoft for this reason alone.
For another example, consider Daimler-Chrysler: At the time of the “merger” of
Chrysler and Daimler-Benz, Jurgen Shrempp (CEO) said that there would be
equality of the companies after the merger. Shrempp later retracted these
statements, publicly acknowledged that he had misled, and appointed a German
to head Chrysler. Many of Chrysler’s executives left the company as the truth
of the situation emerged. So did a lot of investors: From early 1999 to early
2001, the stock dropped 50 percent. Now, in 2007, Chrysler is reportedly for
sale. As Dr. Phil might ask, “So, how has that worked out for you?” Evidence
of lack of integrity was there from practically the beginning.
Back to AES. Questions abound: Will AES ever be able to get a handle on its
accounting? Can any of its reported numbers be relied upon? Has the company
committed intentional fraud with its options practices? Does anybody there
know what they are doing? Does AES’ board have a clue?
With questions like these, why would anybody entrust their hard-earned money
to buying AES stock? The Sensible Stock Investor certainly should not.
| SENSIBLESTOCKS .COM |
| Dedicated to the success of the individual investor |
| ||||||||||
| Click on either cover image to see a full description of that product |