Shares of a company frequently rally after the CEO is fired. For example, shares of Groupon Inc (NASDAQ:GRPN) surged Thursday after Andrew Mason was let go, and shares of Chesapeake Energy Corporation (NYSE:CHK) traded higher after Aubrey McClendon’s resignation was announced in January.
In the same vein, it is likely that shares of Microsoft Corporation (NASDAQ:MSFT), J.C. Penney Company, Inc. (NYSE:JCP) and Cisco Systems, Inc. (NASDAQ:CSCO) would rally if their CEOs were sent packing.
Hedge fund manager David Einhorn called for Ballmer’s resignation in 2011. At the Iran Sohn investment conference, Einhorn derided Ballmer for failing to take advantage of the shift to mobile computing while, at the same time, blowing billions on ill-fated acquisitions and pie-in-the-sky projects.
It’s hard to argue with Einhorn’s assessment. Ballmer became Microsoft Corporation (NASDAQ:MSFT)’s CEO in 2000. In the 13 years since, both the business and the share price have stagnated.
Microsoft missed the mobile computing revolution, losing out to rivals Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG). Its attempt to catch up — Windows 8 and the Surface tablet — has thus far failed to have a meaningful effect on the market.
Microsoft’s search engine Bing, which Einhorn characterized as a “sinkhole,” remains a distant second to Google (about 15% of the market to Google’s 66%). Ballmer hasn’t been shy about making acquisitions, but they mostly haven’t panned out. The company posted a loss last year after taking a $6.3 billion write-down on aQuantive — a company it had acquired just five years prior.
Ballmer’s failings have been enough to create speculation that Gates would consider coming out of retirement. Just last October, Gates had to insist that he remained devoted to philanthropy.
If Ballmer was fired, shares of Microsoft would surge on the hope that new blood could reinvigorate the company. Whether or not that would ultimately happen is another matter, but as long as Ballmer remains CEO, investors will continue to view Microsoft for what it is: a tech utility.
Ron Johnson’s turnaround strategy at J.C. Penney could bankrupt the retailer
Ron Johnson was brought in from Apple in 2011 to turn J.C. Penney around. At the time, J.C. Penney was an old budget clothing retailer, coasting along with a core customer base of lower-middle income consumers.
Johnson wanted to change all that. He had built arguably the most successful retail operation ever at Apple, and at the time he was hired, it was believed that he could work his magic on J.C. Penney.
To put it mildly, he has failed. Shares of J.C. Penney plunged as much as 20% on Thursday after the company reported what was arguably the worst quarter for a retailer ever. Same-store sales fell over 31%, suggesting that the company’s shifting strategy has driven away its core customers. For the entire year of 2012, the company lost nearly $1 billion.
If Johnson was let go, shares would rally on the hope that the new CEO could reverse some of the changes and stop the bleeding. To be clear, J.C. Penney still has cash on its balance sheet, and over $3 billion in available financing, but if the current trends continue, Johnson’s turnaround strategy could destroy the company.
Cisco shares have barely moved over the last decade
Like Ballmer at Microsoft, many believe Cisco’s John Chambers has let his company stagnate.
Chambers has run Cisco Systems, Inc. (NASDAQ:CSCO) since 1995. For the first several years of his tenure, the company experienced rapid growth and a rising share price. But over the last decade or so, Cisco shares have largely stayed put around the $20 mark.
As companies’ IT needs have changed, Cisco has been unable to innovate, failing to take advantage of new business trends like cloud computing. A Reuters report from late 2011 speculated that Chambers could soon step down. About a year and a half later, Chambers remains CEO.
The heat on Chambers has receded somewhat in the wake of a recent, relatively strong earnings report. Shares of the networking giant are up about 11% in the last three months.
Still, when viewed over the last year, shares are up a paltry 3.5% (compared to an 11% gain for the S&P 500). Chambers stepping down could be seen as a sign that Cisco would shift its strategy back to growth.
What should investors think?
Changing CEOs is frequently a sign of changing corporate strategies, and it can provide a lift to the share price. However, that rally might only be temporary if the new CEO can’t follow through.
Both Microsoft and Cisco are relatively ancient tech companies whose businesses have stagnated for the last decade. Replacing them could shift both companies back into growth mode.
Of course, as Ron Johnson’s tenure at J.C. Penney shows, that shift to growth mode can have disastrous consequences. Once stable business models can be torn to shreds in only a few quarters as the company pursues an untested strategy.
The important thing is for investors to be aware of CEOs and their strategies. After all, their decisions control the company’s future.
The article 3 Stocks That Would Rally if Their CEOs Were Fired originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
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