You've done it. You're finally participating in your first investor conference call. It's your turn to ask a question, but the best you can muster is, "So, ummm, what do you think of this weather?" If this nightmare seems like it could be a reality for you, we are here to help.

There are many benefits to having a one-on-one conversation with those at the head of your investments, including: 

  • Receiving information without a middle man
  • Sensing whether management's voice is unsteady or suspicious
  • Building a rapport with the managers

Here are nine questions for management that will have the CEO doing more than delivering the company line. These questions will help you determine whether you want to put your faith and money into a target company.

Question 1: Where do you see sales trending in the next 12 to 24 months?

This time frame will give the investor a good glimpse of the opportunities and the risks that could present themselves over both the short and the intermediate term. In addition, because this is an open-ended question (and not a simple yes/no or one-word answer question), it allows the manager to give a broad response and perhaps touch on a variety of issues that could prove valuable to the investor's decision-making process.

Question 2: What are the risks associated with the sourcing of raw material, or holding the line on costs of services?

This question allows the manager to potentially touch on a variety of factors that could have an adverse impact on raw material or labor costs related to sourcing. The manager's response may give the investor some valuable insight into the future direction of gross margins, which in turn will give some insight into future potential earnings. Truly savvy investors will compare the answer to this question with the earnings projections that the sell side is making.

Question 3: What is the best use for the cash on the company's balance sheet? How does the company plan to raise capital in order to fund future growth?

The manager's answer may indicate whether the company is planning a merger or acquisition, if it will use its cash to buy back common shares in the open market, or if it feels it is better off saving cash for future expansion. This information is particularly valuable because it may alert the investor to potential catalysts that could drive the stock, or to potential risks that could depress it.

If you're asking about future growth, you should be looking for a response that would indicate that the company is taking steps to improve its place in the market. If the company isn't growing and is losing cash, then you know what kind of performance to expect.

(To learn how to read a company's balance sheet, see Reading the Balance Sheet and Testing Balance Sheet Strength.)

Question 4: Who are the emerging competitors in the industry in which you operate?

This question will let the investor know who the competition is, and/or who it may be in the future. It may also alert the investor to new products/services that may be coming to market, which could impact the company at some point down the road. Consequently, management may also disclose plans on how it plans to deal with these emerging competitors.

Question 5: What part or aspect of the business is giving you the most trouble now?

The answer will identify potential weaknesses in the company's organization and provide some insight into future earnings. For example, if the manager indicates that Division X was forced to pay more in the current quarter for its raw materials because of a supply problem (and the investor knows that Division X constitutes 40% of the company's total revenues), the investor could assume with reasonable confidence that there could be a near-term earnings shortfall.

Keep in mind that identifying problem areas is just one part of the equation. It is far more important to hear what the company plans to do to resolve the problem area(s) in both the short and long term.

(To find out how to identify falling stocks, see Warning Signs of a Company in Trouble.)

Question 6: How close is Wall Street in terms of estimating your company's earnings results?

With this question, the investor is asking if the company will meet consensus estimates. Think about it. If the manager answers that "the Wall Street analysts typically underestimate us," the implication is that they'll keep on doing that, and that there could be some upside to future earnings. Conversely, if the manager comments that "the analysts are sometimes a little too optimistic," the implication is that there could be an earnings shortfall at some point in the future.

Question 7: What part of the business do you think is being ignored that has more upside potential than Wall Street is giving it?

Running with your last question, this one will lead the manager into revealing more about the company's positive points. It will probably inspire a long answer from the manager, who will undoubtedly love to talk about the positive aspects of the company that aren't being represented in the media.

The manager's answer will also undoubtedly reveal the source of potential upside earnings surprises, which is important because it may potentially allow the investor to buy into the stock before the impact (of the earnings) is actually reflected in the share price.

(To read more on this topic, see Surprising Earnings Results.)

Question 8: Do you have any plans to advance or promote the stock?

Knowing if and when management plans to promote the stock to individual and/or institutional investors is invaluable, because the savvy investor (assuming he/she likes the company's fundamentals) can buy into the stock ahead of what could be a large amount of buying pressure. Individuals looking to time an entry or an exit point in the stock may also find this particular question to be valuable.

(For more on timing your trades, see Trading Is Timing and Understanding Cycles – The Key to Market Timing.)

Question 9: What catalysts will affect the stock going forward?

Again, this is an open-ended question, so the manager is likely to give the investor a wealth of information. In some cases the manager might highlight the potential for new analyst coverage, the possibility that the company may have a stronger year than most are expecting, or plans to promote the stock. Conversely, the manager might yield information about negative catalysts that could adversely impact the share price.

The Bottom Line

Having one-on-one conversations with managers is a terrific opportunity to garner timely, valuable information. Remember, all of the information you receive from these managers is readily available elsewhere for the public to find, but the information that you glean from hearing how they answer the questions according to tone and speed will say more than any earnings report.

So go out there and be proactive. Call your prospective investment's company managers and participate in conference calls. And don't forget to ask plenty of questions! You'll be happy you did.

(To read more about conference calls, see Conference Call Basics.)

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