Editor's Note: It's easy to overlook a company's CEO after a catalyst sends share prices soaring. But as Sid first explained in 2014, strong leadership is one of the most critical "sparks" he uses to identify major small-cap profit opportunities. Here's how...
It's easy to see why investors pile into a company's stock on the heels of highly successful products, technologies, or services.
Investors rewarded Apple shares after the company's steady flow of innovative product launches, while Alphabet has been on an almost uninterrupted rise since its 2004 IPO.
Even Facebook has recovered nicely after its initial IPO debacle.
In each of those examples it's tempting to focus on the products the company offers, to draw a direct line to their success. The iPhone and the introduction of stylish touchscreen interfaces in the case of Apple, the aggregation and accessibility of all things data-related in the case of Alphabet, or just mere self-indulgence in the case of Facebook.
What's important to notice, though, is that in each case we likely wouldn't be talking about them had it not been for shrewd leadership at the top.
For small caps, finding the right leader can prove a more critical "spark" to major profits...
These Leaders' Decisions Are Critical, and Can Ramp Up or Kill Profits
Some current or former big-cap company leaders we're all familiar with: the late Steve Jobs of Apple, Jeff Bezos of Amazon, Warren Buffett of Berkshire Hathaway, and Bill Gates of Microsoft. They're all synonymous with outsized corporate success.
Would Apple have ever set the world on its ear without Jobs? Would Amazon even still be in business (after years of almost zero profit margins) if it weren't for Bezos? Would investors fill arenas for Berkshire Hathaway meetings without Buffett? And would Tesla be dominating the headlines without Elon Musk behind the wheel?
While those are all well-known examples, the small-cap space has its share of equally visionary (but less famous) CEOs leading some of the most exciting companies in the some of the most in-demand industries. In fact, I think quality CEOs are vastly more important in small-cap companies because they don't have the luxury of surrounding themselves with cherry-picked superstars from competitors.
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Sometimes, though, a company can have all the right products and services in place and ready to go to market, but the CEO bungles critical parts of the company's strategy, such as marketing, production, forecasting demand, or managing leverage, just to name a few.
Fortunately, if the company has a competent board, directors (along with institutional investors) won't stand by idly while the company fritters away opportunity.
That means a new CEO and the chance to profit hugely from one of my favorite catalysts - one that's already proven successful for us - well ahead of the crowd.
The Path to This Catalyst and Profits
My catalyst is the "management change spark," and here's what makes it so powerful...
The majority of huge stock appreciation is driven by institutional investors - not by you and me. So it only makes sense that we want to establish our positions ahead of the big boys. If we can get in before a wave of institutional money, we can simply sit back and let them do all our heavy lifting by driving up the price.
Many institutional investors, especially mutual funds, are limited (by way of the fund's prospectus) in what they can and cannot invest in. Often times they are limited by factors including price, market cap, liquidity, or profitability. In some cases fund managers simply cannot, by law, invest in exciting companies (no matter how much they want to do so) until the stock, or the company, achieves certain benchmarks.
We're not hamstrung by these same limitations.
When a board of directors gives an inept CEO the boot, we can quickly take action, long before the company achieves benchmarks such as profitability, price, or market cap. That is our upper hand over the big players.
If you're like me, I love having even a small edge against the big boys, especially in the era of dark pools and high-frequency trading, where they clearly have the edge.
Here's our way to take advantage of a management change spark and set the stage for our move ahead of the crowd...
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Profit Step 1: If you've identified a company that has all the right pieces in place (groundbreaking technology, an in-demand market, favorable macro-economics, etc...) yet the stock is languishing, keep an eye on the news flow and see if the board removes the CEO.
Boards aren't typically keen on firing the CEO unless they are committed to turning things around so you can view the removal as a very positive sign. This is the first catalyst.
Consider establishing a one-third position when the board announces the removal of the CEO in question.
This will get you into the position with limited risk until the announcement of the permanent CEO.
Profit Step 2: The second catalyst is when the company actually announces the permanent CEO. Take a moment to read the press release associated with the announcement of the new CEO.
Don't worry; the company will make this step easy. They want to get investors excited so the press release will likely have a concise list of the new CEO qualifications.
Ask yourself a few questions as you read the press release. Does the new CEO understand the industry as a whole? Does the new CEO understand what differentiates the company's products/service? Does the new CEO have any experience turning around companies?
Basically, you want to make sure they understand the business. It would be a red flag if the new CEO for an enterprise-scale software company came from a retail background and has no experience turning around a company.
If you're comfortable with the new CEO's credentials, consider establishing the second one-third portion of your entire position.
By adding to your total position in thirds, you strategically increase your upside exposure while still maintaining prudent risk management. This is a critical because reams of historical data demonstrate that risk management is a key factor in achieving and maintaining long-term profits.
Profit Step 3: Keep an eye on the company's news flow. At some point in the not-too-distant future, the company will likely issue a press release with a basic outline of the new CEO's plans on how to right the ship, so to speak.
Once again, you're going to have to do a little reading, but don't worry, companies try to make these turnaround outlines pretty straightforward and easy to understand. You shouldn't have to be a rocket scientist to make heads or tails of the company's plan.
If you're left scratching your head, chances are you're not alone - and that's not a good sign.
On the other hand...
If the company's turnaround plan makes sense, consider adding the final one-third portion of your overall position.
Now it's time to relax, sit back, and wait and see how the company delivers on its plan. If it hits the mark, you should be off to the races long before the "wait and see" crowd starts piling in.
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About the Author
Sid is the investment community's best-kept secret. Since 2009, he's served at Money Map Press as Director of Research, analyzing thousands of securities and profit opportunities for subscribers. He's an expert in identifying "alpha" potential in a wide variety of industries, but especially the small-cap sector, where he's discovered a pattern of profits that's almost foolproof.