Two major CEO changes hit the news yesterday; General Motors (GM) has announced Mary Barra will become the American automotive industry’s first CEO; GM has told reporters that Barra’s engineering background will help the company become more nimble and competitive. The stock is relatively flat on the news (also interestingly, although surely coincidentally, the U.S. government sold off the last of its holdings in the automaker just days before the announcement).
The second big news is Lululemon (LULU), a high fashion high growth name that has had troubles recently. After a controversial comment by the founder and CEO Chip Wilson, the company has announced that a new CEO, Laurent Potdevin, will replace Wilson. Like with GM, the stock is flat on the news.
Past Management Changes and Stock Responses
The famous case of Apple’s (AAPL) recovery, made possible by Steve Jobs’s then controversial return to the floundering company, is perhaps the most often cited case of a change of management changing the fate of a company.
While executives have always been seen as an essential indicator of a company’s future performance, speculation on a company’s future fortunes based on management changes have fueled strong changes in stock prices since Jobs set the stage. This is most obvious in tech. Yahoo (YHOO) has more than doubled since announcing that Google vet Marissa Mayer would become the company’s new CEO. 2013 has been a busy year for the portal site, with acquisitions and restructurings making the headlines almost every month.
Then there’s Microsoft (MSFT), which has risen 17% since Steve Ballmer’s retirement was announced. That growth was partly helped by a strong quarter, but otherwise the stock has seen volatility in both directions as rumors fly of Ballmer’s possible successor.
AOL (AOL) has doubled since Tim Armstrong became CEO, with a lot of those gains being realized in 2013. Like Yahoo, AOL has made some fundamental restructuring that has benefitted the company and shown some strong potential growth. As a result, the stock has outperformed the S&P 500, although it hasn’t outperformed many comparable firms. In the online platform world, AOL is trailing Facebook (FB), Google (GOOG), LinkedIn (LNKD), Pandora (P), and Yahoo (YHOO). Even CBS is outperforming AOL.
The Future for GM and Lululemon
The impact of these executive changes has not been priced into the stock. Whether these changes will be good or bad remains to be seen, but investors still have plenty of time to consider the change and place their bets.
For fundamental investors, these changes are an opportunity to bet on changes in growth thanks to a new executive’s new vision. But more top-down and short-term investors can play the Keynesian beauty contest game, and bet more on the psychology of how investors will interpret these changes. It won’t be easy, though; there are a lot of variables, and most likely earnings and revenue growth will influence the stock much more in the long term.
For all investors, change in a company’s executive structure is a sign to do some due diligence and really understand how these changes will impact the company, and why. Fortunately, executives’ histories are usually a case of public record and a deep study of their past performance by an investor can easily yield an edge that, in the long run, will yield superior returns.