Investors seeking stocks positioned for superior longterm growth may want to consider an unlikely group of companies. Their shares have lagged the market in recent years, but their prospects are looking up as new CEOs take the reins, including Xerox Corp. (XRX), Lands’ End Inc. (LE), Mattel Inc. (MAT) and Gilead Sciences Inc. (GILD), which have all either changed CEOs or will in the coming months, according a detailed article in Fortune.
A growing body of evidence suggests that a CEO replacement driven by a wider strategic realignment tends to result in significant improvements for both the business and shareholders. Whether through dismissal or resignation, a CEO's departure stemming from disagreements with the board over strategy can boost a company's performance over the long run, says University of Missouri finance professor Kuntara Pukthuanthong, co-author of study on the topic, per Fortune. The table below shows how these 4 CEOs and their companies have performed this year.
4 CEOs to Watch
· Xerox: CEO John Visentin; +46% YTD
· Lands’ End: CEO Jerome Griffith; +25% YTD
· Mattel: CEO Ynon Kreiz; +24% YTD
· Gilead: CEO Daniel O’Day (beginning in March); +8% YTD
Source: Fortune; CNN Money.
What it Means for Investors
Between 1995 and 2012, the study finds 97 cases where a CEO was forced out of their position due to strategy disagreements with the board. While the departure is usually followed by depressed share prices over the next year, subsequent years tend to see a reversal of that negative trend. Three years after a CEO change, these companies' share performance saw vast improvements, according to the study.
Xerox is a prime example. Struggling to survive, the company announced in May 2018 that it would replace Jeff Jacobson with current CEO John Visentin. The change came after a battle with activist investor Carl Icahn led to the election of a new board and resulted in the collapse of Jacobson’s efforts to merge the company with Fujifilm Holdings. After the announcement, Xerox shares plummeted as much as 40% through the end of December, but have since rebounded. Under the new CEO, Xerox has generated strong cash flow and its stock is rebounding.
Mattel replaced its CEO three times since 2015 as revenues tumbled 23% between 2014 and 2017. The most recent change came last April when former TV executive Ynon Kreiz took over. Under Kreiz, Mattel now plans to have a live-action Barbie film produced in 2020 as part of his strategy to connect to children through the big screen. He’s also been busy cutting costs. Investors will get a better feel for how Kreiz is doing short term when Mattel reports earnings on Thursday.
Taking charge of a new company, of course, is never an easy job. Daniel O’Day, who is set to become Gilead’s CEO in March, will definitely have his work cut out for him as dwindling sales of the drugmaker’s flagship hepatitis C treatments contributed to earnings that recently fell short of expectations. Investors may not know for another year whether O’Day has begun to put Gilead on the comeback trail.