My first job was working as an investment analyst for closely held companies (family businesses) owned in trust accounts by a bank. I learned a lot in that job but the most valuable lesson I learned was how to evaluate the financial future of a business.
Fresh out of B-school, I knew how to look at the company’s financial history and analyze the prospects for the industry it was in. But the key to understanding the business was always visiting the company and meeting the people who worked there.
These were small companies. By definition they were not publicly traded, so analyzing their value was part science and part art. I soon realized, after looking through years of financials, analyzing the data and meeting the company presidents at their place of business, was that no matter how many factors you took into account when deciding whether to sell the business, what mattered most was who was running the company.
It became apparent that unless there was something extraordinary in the data, the best way to predict the success of a business was to look at the person running it and decide if you believed in that person.
Of course in the committee meetings at the bank where these cases were presented, I couldn’t say that. We had to place a value on the company and decide whether it made sense for the bank, as trustee to hold the company or try to sell it for the beneficiaries.
As anyone who knows about investing is aware, “past performance is not a guarantee of future performance.” So what you are doing when you evaluate a small business is trying to predict the future. And the future depends entirely on the people—especially the person at the top.
I am sharing this story because of one particular company that looked like it had little promise—J.C. Penney. Not only were they a dowdy brand but the entire future of the retail industry is in question. More and more people are using stores as showrooms to pick out the product they find cheaper on the internet.
Now, Ron Johnson, former head of retail for Apple takes over . People are skeptical. There have been stories about missteps at individual stores. The rank and file are not happy. But Rome wasn’t built in a day and the turnover is far from complete. Radical change is never easily accepted.
Johnson knows that it’s people who will help him make a different so he hires away some of the top retail execs to help him.
But once I look at what he accomplished at both Apple and Target and read his story, I’m confident. Because no matter how tough the economic environment and no matter how far J.C. Penney has to come to be a force in retail, I’m betting on the person at the helm.
The stock price today is 36.24. Let’s see what it looks like a year from now.