When someone recently asked for an example of sleuthing that changed my mind, I recalled two. The first could be told with names intact, but was bland and boring; the second would require obfuscation, but was fun. So, of course, I chose the second.
The adventure began when an analyst told me about a stock with hot prospects. The company had a gizmo that helps catch doodad thieves in flagrante . The company had just entered the Slavonian market - an Eastern European country rife with doodad thievery: a few hundred million dollars worth stolen per year. You gotta buy the stock, the analyst said.
It sounded promising, so first I checked out management. None had a criminal record, spats with former investors, or bitter divorces pending.
Next I read the filings. The auditor was reputable, the lawyers good, the footnotes few, revenue recognition plain, inventories slim, patent disputes nil, and debt non-existent.
What of the technology? I asked an engineer I knew to check it out for me - it was fine.
So I called management and arranged to meet the chief executive officer, the chief financial officer and the marketing guy. All seemed smart, hardworking, and honest.
I asked for names of clients I could query. Well, said they, they had only begun to sell, but could give me names of Slavonian resellers with whom they were negotiating, plus the names of some large companies that might offer the gizmos with their doodads.
This was promising, so I asked about the Slavonian stolen doodads industry. The trio repeated that so many millions of dollars worth were sold per year, so many stolen. No, I said. I did not mean the doodad industry. I had meant the doodad theft industry. Was it organized, or disorganized? But why do you need to know this, asked the CFO. A thief is a thief. I explained that if doodads were being stolen by individual hooligans, the resistance to gizmos would be sporadic and bearable. But if doodads were stolen by organized hooligans - who would then suffer a loss of tens or hundreds of millions of dollars - their ability to stop sales of the gizmo could be more effective and detrimental. To this the gizmo executives had no answer - being honest Canadians, they had never even thought of it.
The meeting ended inconclusively, and I was ready to drop the stock idea. But since we had a summer intern then, I decided it might be educational for him to do some further sleuthing. So I had him call Foreign Affairs in Ottawa, get the name of the Canadian commercial attaché in Slavonia, then call him at our embassy.
And here the story gets interesting. Because although the attaché confirmed he had met management and heard nothing but good things about them and their products, there was also a local Slavonian on the call - an employee who gave details when asked, but was otherwise silent. So two hours later I called the Canadian embassy and asked to speak to him. He asked to be called at home, and when I called him there later, the guy, though still reticent himself, agreed to give the name of a local reporter who might help. (It has been my experience that foreign reporters usually know more than they can publish, for reasons of both libel and self preservation.)
After a chat with that reporter, a different story emerged. Yes, Slavonian crime was organized. But a recent clampdown on the drug trade (it provided money for the wrong faction) made doodad theft important for hooligans. So letting gizmos dent such revenues would likely be resisted. Resisted how? Ah, said the reporter, on this he did not wish to speculate.
How to proceed? I browsed through the online list of my biz school classmates, and found one who now worked in Slavonia as a foreign banker. I called, chatted, then put the question to her. Ah, said she, naturally there'd be a pushback to gizmos - though nothing overt. A word in the ear of potential resellers, hints to low-level local execs of the multinationals - the usual.
And what of insurance companies' interest in less theft? Well, said the classmate, it just so happened she knew some insurance execs.
Ah yes, said one executive whom I called. Of course on paper the opportunity to prevent doodad theft looks juicy, but in reality, which (police) militia officer would be unwise enough to retrieve a doodad from the thieves' den, even if found? Thus savings to insurance companies would likely be zip. So, which insurance company executive would be foolish enough to promote the gizmos?
To make a long story short, by the end of the week we realized that the long story was really a short story. So we sold short a few thousand shares. Over the following six months, Slavonian gizmo resellers weaseled out, the multinationals took the gizmo off their Web-based lists, and the executives in charge were transferred back to the United States - no reason given - and so the stock declined. We closed the position with a 30-per-cent profit, which was too soon: The stock today is about 85 per cent lower.
The conclusion? When you think your stock can win by grabbing revenues from hard-nosed opponents, don't assume these opponents will play by Canadian rules. Check them out any way you can - because if you don't, sleuths who do will take your money.