What Most Investors Fail to
Look at When Buying Stocks

The king of the hill no longer…and a good lesson:

It was not surprising to hear that the co-CEOs of Research In Motion Limited (NASDAQ/RIMM) had stepped down earlier this week amid a falling stock price, poor investor sentiment, falling corporate earnings growth, and increased shareholder pressure to find a way to compete with Apple Inc. (NASDAQ/AAPL) and Google Inc. (NASDAQ/GOOG), which have both been steadily eating away at smartphone market share.

It was not surprising either to hear that, amid the economic turmoil, International Business Machines Corporation (NYSE/IBM), or IBM, the world’s largest computer-services provider, not only beat fourth-quarter 2011 estimates with its corporate earnings, but also painted a strong picture for 2012, boosting investor sentiment.

The “BlackBerry” set the standard for the smartphone industry and provided Research In Motion with an enviable brand name that stood for quality and ease-of-use (sometimes referred to as “CrackBerry” by those so addicted to it), which propelled their corporate earnings and their stock price, amid positive investor sentiment. However, Apple and Google redefined the smartphone industry, turning the almost untouchable BlackBerry into an inferior smartphone; the king of the hill no longer.

In 2004, when IBM decided to sell its personal computer business to Lenovo Group Ltd. (Pink Sheets/LNVGY), some people were very surprised. IBM’s management team understood that the personal computer business had become a commodity business. Future corporate earnings growth would have to come from focusing on the services side of the business, leveraging the solid brand name that IBM had garnered.

Contrast IBM’s decision to Research In Motion’s. IBM’s management team was proactive and responded to the changing dynamics of its industry, as was eventually evidenced by the company’s spectacular corporate earnings. Research In Motion was late in responding to what competitors were doing, instead of taking the lead that it had, introducing new products or entering new market segments, leveraging its brand name.

For Research In Motion to succeed at this point, it needs to redefine the smartphone or improve its product line.

This is easier said than done, because now, Research In Motion’s once stellar brand has been tarnished. Had IBM remained simply a personal computer manufacturer, its brand name would have easily been reduced to “little blue,” reflecting stagnant corporate earnings, instead of the respect and positive investor sentiment it garners today with the brand name of “Big Blue.”

Other hardware makers followed IBM after realizing that business services were where the growth and margins would now come from. IBM was able to not only maintain its market share, but also grow it. Today, IBM is once again redefining itself. The company is focused on generating half of its corporate earnings from business software programs that will help businesses analyze and project trends.

There is a big lesson to be learned here from an investor’s point of view.

IBM’s management team is proactive, responsive to their market’s needs, and is constantly searching for the next opportunity to redefine their industry and increase corporate earnings. Research In Motion’s management’s team failed to take advantage of their lead and brand name in order to expand their market share and/or define other market segments they could have aggressively pursued for future growth.

Research In Motion is now in a reactive mode to what the market is already doing. The stock is a very risky proposition here, in my opinion, because the next stage is going to be a critical one. Investor sentiment is understandably at a “prove it” stage. If the company doesn’t execute, its once-elite brand will be reduced to the dustbin and, along with its stock price, corporate earnings growth will disappear.

When it comes to investing, yes, corporate earnings, dividends, and valuations are very, very important. But you cannot underestimate leadership. Steve Jobs put Apple in a position whereby it led the industry with new and exciting products. Thomas Watson, the “father” of IBM who was with the company for 42 years, was famous for simply focusing executives on THINKING.

I cannot stress how important leadership and ingenuity are for a company’s success. It’s something most investors fail to look at when buying the stocks of public companies.