The importance of management execution to company and stock performance can’t be overstated. But that execution must relate to the company and its prospects. In short, what is needed is competence, rather than fame. Let us break down execution into three separate aspects:
1) Management must be good at running a) an operating company; and b) a public company. Both skills are important, but each requires separate skills and senior executives to accomplish. Running the operations means making sure products are produced and sold and operating plans are met. Running a public company means setting expectations both inside the company and outside (with “the Street”) and then meeting those expectations consistently.
2) Being able to execute means the CEO of the company must be “an operator.” That is, someone capable of forming an operating and financial plan for the company, and then a) hiring people capable of achieving operating and financial goals; b) giving those people the resources to achieve those goals; and c) staying out of the way. In short, they need to be managers. And not technology gurus, PhDs or “Doctors” of any kind.
3) Lastly, management execution requires that there be a transparent plan for any excess cash or cash flow created by the company’s operations. As noted earlier, cash flow can strengthen a company’s balance sheet during good times, and be judiciously used to increase a company’s market share during lean times. Solid execution requires that management telegraph its intentions with respect to cash, so that investors need not fear that hard-earned cash may be abruptly put to use in a way that diminishes the company’s prospects.
Now let’s look at how we assemble a portfolio, including The Crabtree Fund.