“Take your pants off.”
That’s what the CEO of Washington Prime, Lou Conforti, said to me at a real estate investment trust (REIT) conference with multiple people present – including my junior analyst, Noah.
Noah stared at me, not knowing how to proceed as Conforti repeated himself, “Take off your pants.”
The exchange was incredibly uncomfortable, and I realized a couple seconds later that he had intended it to be so, as Conforti began telling me about one of his company’s tenants, Victoria’s Secret.
I felt like I had been slimed and was grateful that no female member of my team had been present.
I knew immediately from this exchange that Washington Prime’s leadership was a bit eccentric and that our team needed to watch the company closely. It doesn’t matter how perfect your business model is, poor management destroys a company.
In my Intelligent Income Daily newsletter, my goal is to steer you toward financial freedom and away from shady business dealings.
So today, I will share with you how this story ended and why we go to great lengths to assess the quality of the management teams in the companies we recommend.
Knowing the signs early helps keep us away from poorly managed companies, and in the ones that keep making us money instead.
How the Story Ends
A few months after my encounter with the CEO, we downgraded shares of Washington Prime to a Strong Sell (based on deteriorating fundamentals), and I told my subscribers that the company was a sucker yield.
[For a reminder of what a sucker yield is, click here.]
Washington Prime’s dividend yield approached mid-double-digits, and investors were pouring in – mesmerized by fool’s gold.
But our team stood firm, recognizing that the dividend wasn’t sustainable. A few months later, I witnessed the company implode.
Now, I knew from listening in on Washington Prime’s earnings calls that the CEO loved the band Queen.
So it seemed fitting that when the company filed for bankruptcy in 2021, I, with great pleasure, titled the article: “Another One Bites the Dust.”
Needless to say, my first clue to avoid the company was revealed in one of the most awkward moments of my research career.
Management Matters
Many times, my interviews with management teams – either on or off the record – give me clues about the overall quality of a company.
This certainly happened in the case of Washington Prime.
And it also happened again a few weeks ago.
Now, I cannot name names because this conversation was off the record, but I was speaking with a CEO who informed me that one of his competitors was intimidating several customers of other companies.
This CEO informed me that these customers were annoyed, and they didn’t want to do business with the CEO that was harassing them. As a result, they were contacting his team in the hopes of putting distance between themselves and their bully.
Now, this did not surprise me because I had been doing my research. From all the data I had gathered, I knew the story was credible – but I followed up to be sure.
Every time I had spoken to the CEO of the company that had been harassing clients of other firms, I found him incredibly arrogant and edgy. (Sound familiar?)
I was already on the fence, as our team was considering downgrading this company based on conflicts of interest, an elevated payout ratio, and stupidity (pivoting to a new business model).
So when I heard about the customer service issues, I knew that it was time to double-downgrade the company from a Speculative Buy to a Sell.
As this situation is currently in the works, I can’t comment further. But I will say with confidence that it is only a matter of time before this company goes the way of Washington Prime.
And at Wide Moat Research, we don’t wait around to find out how a company will implode once we recognize that it will.
Our team is laser-focused on stewardship, recognizing that management plays a key role in value creation.
If the company loses market share (i.e., loses customers to competitors because the CEO is an a-hole), is unable to raise prices (no pricing power), or has a history of value destruction, we move swiftly to get investors to safety.
Owner’s Orientation
One of the best ways to assess the strength of a company’s business model is to put yourself in the shoes of the management team.
By pretending you’re the CEO of the prospective business, you can then make a more logical assessment of the company from an owner’s orientation.
So when I decided to double-downgrade the above referenced company, I recognized that there was no unique competitive edge that the company had over its peers whatsoever and that the potential for shareholder destruction was elevated.
Being able to communicate with management is an extremely important part of our research, and finding these “nuggets of wisdom” allows us to strike gold as well as spot fool’s gold.
This week, I will be recommending another company in our latest issue of the Intelligent Income Investor. And just like the management teams of the companies I mentioned above, our team has thoroughly vetted this one.
My team and I are determined to provide you with safe and reliable income investments with quality leadership based on fundamental analysis and firsthand experience.
To learn more about our Intelligent Income service and receive a free pick, click here and watch to the end.
There’s no perfect management team, but it’s critical to pay very close attention to the CEO behind the wheel.
And that means getting into the driver’s seat and making sure the company is staying in its lane, and not veering into a ditch while shouting out, “Take your pants off.”
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily