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February 14, 2005
Don't Buy the CEO Ouster
I received an interesting report today from Arnie Berman, one of my favorite tech strategists, now at research firm CreditSights (formerly at SoundView). The headline immediately caught my eye: "Don't Buy the CEO Ouster. Wait. Then Wait Some More."
To cut to the chase, the report concludes that investors looking for a way to play Carly Fiorina's ouster at Hewlett-Packard should wait about eight more months before buying the stock.
Berman looks at the performance of tech outfits that ditch poorly-performing CEOs. He finds that the date of the ouster doesn't typically coincide with a bottom in the stock -- that usually occurs three to five months after a new CEO takes over.
Here's how it usually works: After giving the CEO the boot, a company typically takes about four months to install a new chief. That individual then airs all the company's dirty laundry about one quarter into the job and the stock bottoms. That's when it makes sense to buy.
"New leaders typically encounter plenty of tough slogging in the early going--prompting them to lower expectations even as they clean house," Berman writes. "Fear, uncertainty and doubt are only replaced by optimism once new leadership can prove some measure of success."
For HP investors the lesson from Berman's analysis is clear -- HP probably won't become a buy until late in 2005.
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