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There is a widely-held perception that CEOs don’t tend to last very long at big companies – maybe just three or four years on average. The truth, however, is not that bad if you are a CEO (or a person who loves one). The average CEO at a Fortune 500 company actually lasts about 8 to 10 years. Still, because the CEO is the face of the company and critical to its success, CEO turnover can cause volatility in a stock’s price – especially if it is unexpected and especially if the CEO leaves in less-than-voluntary circumstances. The latest example comes from Twitter (NYSE: TWTR ). Dick Costolo, who has announced he will be gone effective July 1, had served as Twitter’s CEO since 2010 and helped take the company public in 2013. The nice thing about being the CEO of a private company is that you have the luxury of time. You can more easily focus on the long term. Once you go public, however, you have a stock price that investors constantly monitor. Your stock is like a voting machine, and your stock price tells you how investors think you’re doing. Investors were telling Dick Costolo that he wasn’t doing well at all. After a brief run-up following the IPO, shares of Twitter, which has never been a profitable company, faded. Today, the stock sells for less than the first trade at the IPO. Investors were telling Costolo loud and clear that it was time to go. He asked the Board of Directors to name a replacement. That’s all well and good, but from my perspective, I don’t really care if Costolo was a good or bad CEO. As far as I’m concerned, the more important question is, does it make sense to buy the stock now that the CEO is gone? That’s what lots of investors thought when Costolo’s departure was announced. Twitter stock rallied almost 7% in after-hours trading right after the company announced that Costolo was stepping down. (That may have been a blow to his ego, although it did boost the value of his own shares and options by millions of dollars – at least temporarily.) However, the euphoria did not last. When the market opened for trading the next morning, half the gains were gone. By the end of that day, the stock was back to pre-resignation levels. And by the end of the following trading day, the stock had tanked 3.2% below where it had been just before the announcement of Costolo’s resignation. Investors apparently came to the conclusion that Twitter’s problems went well beyond Costolo’s personal inability to implement a winning strategy. McDonald’s (NYSE: MCD ) provides a bit of a counter example. When CEO Don Thompson resigned in January, the stock rallied 5.1% by the end of the following day. But in McDonald’s case, the stock kept going higher. In fact, it rallied for more than a month. It has given up some ground since, but it remains higher than it was before Thompson’s resignation. With McDonald’s, investors seem to believe that the problems were more closely associated with the CEO than they were with any fundamental problem with the business. McDonald’s has to make its hamburgers more popular and it has a lot to prove, no doubt. But Twitter, remember, as popular as its service already is, has yet to prove that it even can be a profitable business. So, in general, does it make sense to buy the stock when an unpopular CEO steps down? For the short term, the answer appears to be yes; but only if you can act quickly enough to buy the stock before the run-up. Keep in mind that these kinds of announcements are typically made during non-trading hours. For you to have made money on Twitter, you would have had to be sitting at your trading desk rapidly buying and selling when the market was closed. For the longer run, the answer depends. The more investors believe that the company’s troubles are due to bad management and not to a broken business model, the more the stock will rally – and keep rallying – when the unpopular CEO resigns. But if investors think the company’s problems are so endemic that even a new star CEO can’t fix them, you will be better off taking a pass. Scalper1 News
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