Skip to main content

MILLBURN, N.J. (TheStreet) -- Do you really know the company that you are investing in? Most investors look at the financials or the stock charts of a company. Perhaps they visit a company's retail location or try its products. But they overlook or disregard many other important, often intangible factors. In this installment of The Finance Professor, I'll point out a few of them.

1. Line of Business

Do you know how your company generates its revenue and earnings? Most people generalize or categorize the company's business model. You need to dig a little deeper. Most people still think that

International Business Machines

(IBM) - Get International Business Machines Corporation Report

makes most of its money from mainframe and personal computers, but IBM sold its personal computer division to Lenovo several years ago. As for mainframes, that is a small part of the revenue stream at IBM. The company only generates about $1 in every $6 from systems sales. The lion's share of its revenue comes from software and support.

I own

Olin

(OLN) - Get Olin Corporation Report

. What led me to Olin was its core business of chemical products. I was searching for exposure to chemicals. What really intrigued me was that about 35% of Olin's revenue comes from the sales of Winchester firearms and ammunition. I got a twofer, because I was also seeking out exposure to guns and ammo to play the an ammo shortage in this country right now. Those looking for an investment in chemicals only might have been deceived by Olin.

2. Second Generation Syndrome

Did you ever notice that after a founder leaves a company, very often the next generation of management does not perform as well? There have been many articles and academic studies on this subject. In general, successor CEOs do not perform as well as their predecessor founder CEO.

The stock price of

Home Depot

(HD) - Get Home Depot, Inc. Report

peaked in 2000, at just about the time when two of the company's founders, Bernie Marcus and Arthur Blank, retired. HD handed over managerial control of the company to Robert Nardelli, and despite one of the biggest homebuilding and renovation booms in the last half century, shares slumped during his tenure. As it turns out, HD shares dropped so much earlier this year that I bought some stock. So far, it has appreciated nicely.

TheStreet Recommends

This phenomenon is also true when the next generation could be the child or sibling of the founder. Let's take a look at

Playboy

( PLA). The adult-themed media company was founded by Hugh Hefner, who handed over the reins to daughter Christie Hefner in 1988. After some of the biggest bull markets in history, Playboy's stock declined nearly 75% during her tenure as chairwoman, which ended on Jan. 31, 2009.

Of course, the second-generation effect is not always negative. Irwin Jacobs co-founded

Qualcomm

(QCOM) - Get Qualcomm Inc Report

in 1985. He stepped down as CEO in July 2005, handing over the reins to his son, Paul Jacobs. Qualcomm stock has appreciated by about a third during Paul Jacobs' tenure as it continues to be a leader in wireless telecommunications technology. When you look at this case in further detail, Paul Jacobs was highly qualified for the position, having earned a bachelor's degree in electrical engineering and computer science, a master's degree in electrical engineering and a Ph.D. in electrical engineering and computer science. In this case, the apple did not fall from the tree.

Speaking of apples, early this year concerns spread as to the health of Steve Jobs, co-founder and CEO of

Apple

(AAPL) - Get Apple Inc. Report

. Jobs is now back to work, and the company is stronger than ever. During his absence, the company's interim management team performed quite well, but there is still some degree of uncertainty as to how the firm will perform once Jobs is no longer in charge.

3. Location of Business

You might know the products or services that will drive a company's revenue and earnings, but do you know where that company operates? I can't emphasize how important this fact is. This intangible factor takes one of three forms.

First, there are retailers that are in the process of expanding. Expansion means growth, and as investors, we are always on the prowl for growth. Initially, retailers start as one store and then slowly add more units. This expansion begins in one locale and then spreads. First the growth occurs within a state, then within a region and finally from coast to coast.

Dick's Sporting Goods

(DKS) - Get Dick's Sporting Goods, Inc. Report

for example was founded by Richard Stack in Binghamton, N.Y., and over the years, it slowly added stores across upstate New York. The company slowly grew through the Northeast and then down the Eastern seaboard and into Florida, helped along by the acquisition of Galyan's in 2004. Soon the company expanded westward into Texas and the middle states. Dick's Sporting Goods is now completing its coast-to-coast expansion with a presence in California, achieved through the acquisition of Chick's Sporting Goods. As you can see from

this map

, there is more opportunity for future expansion.

Second, there are businesses with a business model that is only conducive in certain geographies. For example,

Sonic

(SONC)

is a drive-up restaurant chain. The company advertises nationally, and management has grand designs to expand from coast to coast. However, if you take a look at

Sonic's distribution

, it is clearly a warm-weather business concept.

Lastly, there are international factors. Companies that operate in many countries are referred to as multinationals, such as

Pfizer

(PFE) - Get Pfizer Inc. Report

,

McDonald's

(MCD) - Get McDonald's Corporation Report

and IBM, which all generate revenues in the U.S. and abroad. When a company earns money outside of the U.S., revenue and net income will be influenced by fluctuations in foreign currency. Thus, it pays to know where these companies operate, the currencies that are transacted in those countries and the relationship to the U.S. dollar in the foreign exchange markets.

-- Written by Scott Rothbort in Millburn, N.J.

At the time of publication, Rothbort was long OLN, HD, AAPL, DKS and MCD, although positions can change at any time.

Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational Web site

TheFinanceProfessor.com

.

Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at

www.lakeviewasset.com

. Scott appreciates your feedback;

click here

to send him an email.