Why do new CEO announcements sometimes cause a stock rally?
We saw this during the week with the likes of Adidas hiring Puma’s CEO Kasper Rorsted (Adidas is up 26% in the past five days alone) & earlier in the month with Starbucks (SBX) appointing Laxman Narasimhan as their new CEO after he left his CEO position at Reckitt. (SBX rallied on the news +6.9% the week following the announcement.)
History often shows us that great companies, more often than not, hire leaders from within their organization. For example, in Good To Great by Jim Collins, “10/11 great companies hire leaders from within their company, not outside.”
According to BoardEx, the top three CEO transitions in September 2022 consist of one internal promotion and two external.
🍿 (Internal) AMC Networks appointed Christina Spade as its new Chief Executive Officer. Spade was previously CFO and CFO/COO of AMC.
🦷 (External) Colgate-Palmolive (India) appointed Prabha Narasimhan as its new Chief Executive Officer and Managing Director. Before Narasimhan joined Colgate-Palmolive, she was with Hindustan Unilever as their Executive Director and Division VP.
👟(External) Footlocker appointed Mary N. Dillon as its new President/Chief Executive Officer. She was previously the CEO of Ulta Beauty.
According to a study by Harvard Business Review, “There is no positive correlation between how a company’s stock fares upon the announcement of a new CEO and the share price over that CEO’s tenure.” - The study suggests ignoring the market’s reaction.
In short, a stock's price is ultimately affected by news and perception. Suppose the transition is done with a CEO seen as capable and knowledgeable about the given business. Investors tend to have more confidence in holding the stock. When leaders come from within their organization, it is seen as them being knowledgeable about the given business. This could have various effects on the organization.
Some investors even follow business leaders. Similar to how you may follow a favorite football player in fantasy football or a favorite celebrity influencer. You want to know what they are doing next because you Value their input/influence on the team, organization, or business. You value them as capable leaders. This is why sometimes popular external CEO announcements can have a positive effect on the given stock in the short term.
While these short term rallies seem promising it’s important to know the difference between price driven rallies and value driven. Price is what you pay and value is what you get, Stock Explorers! Value is reflected over the long term not the short term.
As stockholders, we ultimately have power over perception. If the majority of stockholders are “fans” of the new CEO, This is a positive for the stock. If the majority of stockholders are “haters” of the new CEO, this is a negative for the stock in the near term.
Who's in your CEO fantasy lineup?
Here are a few of Stock Explore’s favorites:
Mary Dillon tripled Ulta’s net sales over her tenure at the company. - she took Ulta beauty from a regional player to a national powerhouse.
The Co-CEO’s of Revolve disrupted the world of online shopping.
Mary Barra the CEO of GM was initially not a crowd fan by Wall Street , she had some serious “haters” that she has since proven wrong.
Stock Explore’s Weekly Reads
The Secret School for Afan Girls: https://www.washingtonpost.com/world/2022/11/02/afghanistan-girls-school-education-taliban/?utm_campaign=wp_main&utm_medium=social&utm_source=twitter
Apple’s bargain with Beijing:
NFLX to Add live sports: https://www.reuters.com/business/media-telecom/netflix-explores-investing-live-sports-bids-streaming-rights-wsj-2022-11-08/
Gen Z’s Top Brands: https://www.visualcapitalist.com/gen-z-favorite-brands-compared-with-older-generations/