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Stock Strategist

Are CEOs Telling You What Really Matters?

For the 2010 Morningstar Stocks Forum this week, we highlight several key questions to keep in mind as we observe management teams' presentations.

We here at Morningstar have geared up for our fifth-annual Stocks Forum being held in Chicago Nov. 3-4. Management teams from 30 high-quality companies will present the investment case for their companies Nov. 4 and field questions from attendees.

The opportunity to hear a company's story straight from the horse's mouth is certainly one of the highlights of the forum. There is a lot you can glean from a presentation that would be hard to see in the cold hard facts of an SEC filing. Below are several key questions, as well as subsequent questions, that attendees may want to keep in mind to get the most out of the talks. For those of you who can't make it, we'll be blogging several of the big presentations, and we'll have plenty of video interviews with management teams.

Is management spending a lot of time on one topic?
Often management teams will spend a disproportionate amount of time on one topic during a presentation. There can be one project, product, or idea that gets talked to death. This is a good sign that management is spending a lot of their time back in the office on this initiative.

Investors need to decide if this project is really going to move the needle for the firm or if it is just a pet project. Perhaps it is even a distraction from some not-so-good corporate news, which brings us to the following question.

What got left out?
Almost as important as what gets said is what doesn't. Are there huge parts of the business that get completely ignored? Are problem areas being swept under the carpet? Obviously it is impossible to cover everything a company does in a short period of time so the mere absence of a topic shouldn't cause concern per se. But if a pressing issue doesn't come up at all, it could be a red flag.

How sincere is management?
Admittedly, this is a squishy concept at best and is hard to figure out during a 40-minute presentation. But making an assessment on management's ability to be a good steward of your capital is a key investment decision. Did you believe everything that management said? Do the projections sound too rosy? Were they able to admit where problems exist? It is a good sign if you come out of the presentation impressed and with a solid sense of where the business is going.

Management can also help shed some insight on questions that go beyond their company.

What's happening with the economic recovery?
It's easy to get lost in nationwide statistics on the progress of recovery. Economic recovery is almost always uneven, and seeing what is happening on the ground can help fill in the holes left by the broad stats.

Where is a management team seeing strength and, where is there weakness? Which consumers are still out there spending, and who are still sitting on their wallets? Are higher-end goods outperforming more basic goods, or is it vice versa? For non-consumer-facing firms, what kind of demand are they seeing from end users? Are their orders still just filling depleted inventories, or are other businesses beginning to expand?

By looking at the answers to some of these questions across many different firms in different industries, investors can get a good sense of what is happening in corporate America.

Are firms looking to invest?
One of the sure signs that the economy is back to sustainable growth will be when businesses are eager to reinvest. Today, many firms are hoarding cash and using existing idle capacity to meet demand. Do management teams have plans to add capacity, hire more employees, and expand into new business areas?

Even if there aren't any specific plans announced during a presentation, often the tone of the entire talk can reveal if the management team is optimistic or still retrenching from the recession.

Are there signs of more M&A activity?
The rise in mergers and acquisitions by both public companies and private equity firms during the last few months has been seen as a sign of confidence in the market. Is that going to continue? Will management say there needs to be consolidation in their industry? Can they see themselves doing a big deal, or will a more risk-averse attitude prevail?

Stay tuned to our coverage of the Stocks Forum to see how many of these questions management teams will be able to tackle Nov. 4.

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