Getting a full picture of a potential investment requires an open mind and a shoe-leather approach.

By Nate Burggraf

One of the most rewarding parts of my job as an investment analyst is the aha moment — the point when I realize I’ve found a promising stock. I never know when that moment will come or what will prompt it, so I continually turn over stones in search of hidden opportunities.

I had such a moment recently. During a trip to a slate of Midwestern industrial companies, I included a stop at an unassuming manufacturer. Its financials checked out, with strong margins and smartly growing earnings, and it had a history of innovation. But those characteristics are true of many businesses, and there wasn’t enough in the raw numbers to truly distinguish this one. Still, as I was headed to the region anyway, I added the company to my itinerary.

My first surprise came before I even set foot in the headquarters. After my flight, a colleague and I chatted with a worker at the airport’s shoeshine booth. When he heard that we were visiting this midsize manufacturer, a wide smile creased his face.

“I know several people who work there,” I recall him saying. “It’s one of the best employers in the city.”

He described the company’s good reputation: Not only did it offer generous employee profit sharing, but it hadn’t laid off a line worker since World War II. By themselves, those details wouldn’t necessarily have investment implications. After all, plenty of businesses offer job security and good compensation. But that came on top of what I already knew about this company’s promising fundamentals.

Aha, I thought. A reputation like that isn’t built overnight. It seems management had long made labor force relations a priority and did so without sacrificing financial results. That implies a careful alignment of worker incentives and company health — a strongly positive mark. My visit was already shaping up to be more intriguing than I anticipated.

Financial reports tell a critical part of the story — but only one part.

At Capital Group, one of the hallmarks of our research process is that we examine potential investments from many angles. That means speaking to a cross section of voices: corporate officers, frontline employees, customers, industry specialists and my fellow Capital Group analysts. Whenever possible, my colleagues and I also strive to conduct in-person visits. Face-to-face contact can provide a crucial intangible that lets us read body language and glimpse day-to-day operations.

The bottom line is that many important details simply can’t be found on earnings reports. Every piece of information adds a bit more context to what I already know. Every data point gives shape and nuance to every other point.

For example, I can gauge corporate efficiency by calculating return on invested capital, but that doesn’t tell me the actual state of a company’s operations. As someone who covers small and midsize manufacturers, I know that key signs of a well-managed operation are found on a factory floor. Is it clean and organized? Do all the products and constituent pieces have a place? Is there a clear and easily navigable path for workers and goods?

These details might sound trivial, but they’re quite important. Fast growth is sometimes a double-edged sword that can overwhelm a management team and cause capital allocation and operational processes to slip over time. A carefully managed work floor can reflect a dedication to order and efficiency that’s replicable and scalable — critical for any manufacturer looking to offer consistent shareholder growth.

I’ve often found scraps of useful knowledge in unusual places. For example, my colleagues and I frequently ask companies to discuss their competitors. We’re not looking for idle gossip; rather, we want to see if a company evaluates itself the way its rivals do. It can be very telling when perceptions either align or deviate. Because of Capital Group’s global research operation, I typically have access to companies around the world through my colleagues in Asia and Europe.

In that vein, some of the most enlightening information has come from unaffiliated industry experts and even from former employees. In fact, one of the most glowing reviews I ever heard came from an employee who had been fired. The man hadn’t been able to resolve a disagreement with a manager, but he had nothing but kind words for the company itself.

Of course, it’s critical to remember that these details, no matter how vivid or illuminating, can’t form the core of an investible thesis. A company with a great culture but bad fundamentals is likely going to be a poor investment. However, this kind of information can shine a spotlight on a potential investment that might otherwise be overlooked.

The real goal is to get a full picture.

My visit to that Midwestern manufacturer offered a few more surprises. When my colleague Will Craig and I arrived at the headquarters, we were disturbed to see a large photograph of what we presumed to be the CEO prominently hung in the lobby. This kind of lavish display often hints at ego-driven spending. But we were quickly disabused by the security guard, who happily explained that we were looking at a portrait of the previous CEO, who had overseen most of the company’s growth. Moreover, the guard said that this leader was still very well regarded by employees, not just for his business prowess but for his personal touch.

“He and I would talk about football over a drink sometimes,” the guard added with a grin.

Ultimately, the combination of this company’s fundamentals and its vibrant, tight-knit culture swayed me. I recommended the company to our portfolio managers. Its financial reports were extremely encouraging, but nothing was as powerful as what I saw in person.