To paraphrase the 17th-century philosopher Thomas Hobbes, the
tenure of a corporate executive can be "nasty, brutish and
short." Indeed, many CEOs and chief financial officers last just
a few years on the job before the board decides that fresh blood
Most of the time, such a transition appears to be orderly, but
when an abrupt change is made, you should almost always move
quickly to sellshares . There's a very good chance that you'll be
able to buy back shares at a much better price down the road, for
reasons I'll explain in a moment.
Scandal In The Grocery Aisle
After a series of stumbles, including a botched deal to buy
Pringles potato crisps and allegations of price-fixing of in the
walnutmarket , several executives at
Diamond Foods (Nasdaq: DMND)
were abruptly terminated in February 2012. Shares suddenly
collapsed by two-thirds from prices seen just a few months
earlier, leading some investors to start to bottom-feed thisstock
in search of value.
Such buying turned out to be premature, as Diamond Foods'
problems only deepened from there, and the company repeatedly
missed filing deadlines with theSecurities and Exchange
Commission (SEC) .
Yet even though attempting to catch afalling knife like this
is unwise, it's still worthwhile to track a broken company's next
moves. It took nearly ayear for Diamond Foods' new management
team to fix the mess, but by early this year, it was increasingly
clear that the crisis was passing and improving quarterly results
lay ahead. In the past six months, this stock has posted an
impressive 60% rebound.
Polycom And RadioShack: Tied At The Hip
Earlier this week, executives at
Polycom (Nasdaq: PLCM)
left their companies for very different reasons -- but investors
should steer clear anyway.
Video- and audio-conferencing equipment maker Polycom asked
itsCEO Andrew Miller to pack up his desk after the board
discovered "irregularities" on his expense reports. At first
glance, this should have no bearing on the company's prospects,
and indeed, the company paired this bad news with a fairly solid
Yet the CEO change means that Miller's successor is likely to
come aboard, review operations for a few months, and then
establish a new (usually lower) set of forward expectations.
That's what all new CEOs do. And these folks often replace key
company executives with their own trusted lieutenants, creating
disruption in thesales force and product development
The key takeaway: Although shares of Polycom fell roughly 10%
on the news of Miller's departure, few positive catalysts exist
in the nearterm , and a new CEO, once in place, may look to
lowerearnings expectations for the company as major operational
changes are made.
The Sinking Ship
It's hard not to feel for RadioShack CEO Joe Magnacca. He took
the reins of the beleaguered electronics retailer in February and
is trying to move quickly to reverse a half-decade of missteps
made by his predecessors. Yet he doesn't have the luxury of time.
RadioShack'sbalance sheet has been badly depleted, and the
company may need some sort of financial lifeline.
The abrupt departure of CFO Dorvin Lively also implies that
Magnaccawill have to make choices that are unpalatable to
investors. Perhaps the company will need to sell alot of stock to
stay afloat. Perhaps it will sell morebonds with very high
yields, which would only heighten the company's financial risk.
Whatever tough course is chosen, it's up to the CFO to try to
calm nervous investors while internally tightening an already
tight cost structure. This CFO's departure almost guarantees that
more tough times lay ahead.
Risks to Consider:
As anupside risk, management vacancies sometimes pave the way
for asale of the company, though that is hardly a reason to
consider purchasing a stock.
Action to Take -->
Can Polycom and RadioShack turn things around? Perhaps. The new
management team at Diamond Foods has managed to turn the ship
around, but it took severalquarters before progress appeared. In
the interim, shares were left to drift steadily lower. That's why
it's wise to "sell on the news" when you hear about executive
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