New CEO, New Growth for Stock? Not Necessarily
Shares of Irvine-based Fluor Corp. were languishing around $35 last week, having crashed from a peak of $75.94 in August as the company’s global engineering business has faced mounting competition and shrinking profit margins.
But when Chief Executive Leslie McCraw surprised Wall Street on Dec. 10 with his decision to retire Jan. 1--a move necessitated by health problems--Fluor shares quickly began to rise, and have gained in every session since. They were bolstered further after Fluor on Monday announced “accelerated” plans to boost shareholder value, even before a new CEO is named.
At $39.19 on Wednesday, the stock is up 12% since Dec. 10, while the Dow Jones industrials have fallen slightly in that period.
On the face of it, Fluor’s case suggests there’s a sure-fire formula for making money in stocks: When a new CEO is about to take control of a well-known company that is troubled or weakened and whose stock is in the dumps, just buy. Period.
Two other glowing examples this year of big-name stocks that, in retrospect, should have been bought as soon as a new CEO’s name was in the air:
* Cable TV giant Tele-Communications Inc., whose shares were trading near their four-year low of $10.75 when Leo J. Hindery Jr. was named chief in February. The current price: $27.69.
* Long-suffering AT&T; Corp., which has seen its shares zoom to $57.88 now from $40 in early September, when rumors first surfaced that C. Michael Armstrong would be put in charge.
Reach back further, into the early to mid-1990s, and great buying opportunities presented themselves with CEO changes at IBM Corp., Sunbeam Corp. and Times-Mirror Co., parent of The Times.
Is it really this simple--buy on the CEO change, ask questions later? It looks easy enough, but then, all successful stock-picking tends to appear that way in retrospect. What’s that they say about hindsight being 20-20?
The basic idea of buying a depressed stock on the expectation that new management is about to shake up the business--and revitalize the company’s growth prospects--is, of course, as old as investing itself.
David Decker, manager of the Janus Special Situations stock mutual fund in Denver, says he finds that, at a minimum, CEO shifts present a good reason to look more closely at companies with which Wall Street has become exasperated.
But all troubled companies are different, Decker notes. So he starts his evaluation with this question: What is the magnitude of the change a new CEO can effect?
A business whose problem has been lousy management rather than lousy fundamentals naturally has more potential to be fixed than does a business whose fundamentals are deteriorating rapidly, Decker says.
“It’s much harder to change a bad company with new management,” he says.
In the case of Tele-Communications, Decker bought the stock after new CEO Hindery last spring convinced him that cable TV is still a good business, “if you don’t spend and spend and spend” shareholders’ capital away, Decker says.
Brought in by cable magnate John Malone to restore TCI’s luster on Wall Street, Hindery recognized that investors were demanding that TCI cut back its expansion plans and focus more intently on earning a decent return on shareholders’ capital.
Scott Schermerhorn, senior portfolio manager for value stocks at Federated Investors in Pittsburgh, had a similar experience with Sun Co. this year. The stock has doubled as new management has decided to pay as much attention to the company’s laggard refining and marketing business as old management had to the now-jettisoned energy production side of the business.
In other words, for both Tele-Communications and Sun, there were identifiable problems that new management could attack with relative speed.
But Decker also notes the case of garbage hauler Waste Management, which named a new CEO in summer--only to see him quit three months later in the face of what many analysts believe are massive internal problems that lack simple solutions.
Of course, for many new CEOs of the 1990s, success in spurring the stock price higher in the short term has depended on little more than a loudly spoken command to the troops: “Cut costs.”
That helped fuel the eventual rebound in Eastman Kodak Co.'s stock price after ex-Motorola Inc. chief George Fisher took over as CEO in 1993.
But cost-cutting may be far more difficult in many already-lean businesses today. In any case, the much greater challenge for new management of a troubled firm, Decker and Schermerhorn note, is restoring the long-term growth of sales and earnings from the business’ base operations.
In Kodak’s case, the stock’s renewed slide this year, from $94.50 to $56.50 currently--just $6 above the stock’s level when Fisher took over four years ago--reflects the fear that Fisher has been unable to address Kodak’s fundamental problem of a high cost structure in a business that is under siege by ravenous competitors such as Fuji Photo Film Co.
In short, Decker, Schermerhorn and other pros say, buying a stock solely on the news of a management change--and buying for a quick profit--may turn out to be a winning strategy, but that’s gambling rather than investing. Good luck.
Better to go into these situations only after careful study, Decker advises. Buy, he says, “if you understand the company, and if you believe that the company has identifiable problems that can be addressed by new management.”
Tom Petruno can be reached at firstname.lastname@example.org