Advanced Stock-Picking: Grill Top Brass

From Talking to Management, Part 2: Gleaning Financial Subtleties:

What proportion of your earnings are free cash flow, available to be invested in new opportunities, stock buybacks, or dividends?

Again, a good analyst has a reasonable feel for the answer to this question. If management oversells its ability to deliver free cash flow, that's a red flag. With companies that I am short, I often ask about when they will increase the dividend or buy back stock. Alternatively, I ask about the prospective rate of return on their new projects, but more on that in the next section. You can ask a management team outright what proportion of the company's earnings is free cash flow and then analyze that for reasonableness.

As an aside, you can stay clear of a lot of blowups by avoiding companies that have strong earnings and weak or negative free cash flow. If a company has to plow a lot of cash back into the business to maintain it, it's often a sign of costs that aren't reflected in the current profitability of the business. At the edge, big deviations can indicate fraud; for example, I avoided investing money in Enron as a result of this analysis.

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From Talking to Management, Part 3: The Competition

If you could switch places with any of your competitors, who would it be and why? Alternatively, if you think you are the best positioned, who is next best, in your opinion?

This question usually won't get an answer in large forums. It's best saved for more intimate gatherings, because to the wider investing public, most companies portray themselves as the best. Also, in diversified corporations, it's useful to ask this question of divisional heads rather than the CEO. They have a closer feel for the competition they face on a day-to-day basis.

When answered, this query can yield new research vistas. Who knows company quality better than an industry insider? The response can bring out the unique reasons a competitor is succeeding -- and, potentially, what this company's current management team is doing to challenge the competitor.

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From Talking to Management, Part 4: Prices and Products

Do you have any complementary products in the works that open up new markets for you?

Much of the time, growth happens through a willingness to explore offering products and services that are one step removed from existing offerings. This could be a new marketing channel, offering the product internationally, extending the brand, offering services that complement the product, etc. Often a move like this precedes growth in profitability; it means that executives are looking for low-risk ways to expand the franchise.

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From Talking to Management, Part 5: Understanding Major Shifts:

What do you think is the most important change happening in the competitive environment at present?

This query can highlight emerging issues and demonstrate how the company is adjusting to the changes. Again, you need to compare the answers of various managers against each other; an odd answer could either be ahead of the pack or out of touch. If you think the answer makes sense, it can open up new questions that further enhance your understanding of the industry and the role that the company you are interviewing plays in it.

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Need help with some financial jargon, visit TheStreet.com's Glossary.