Novice Investing - Why Share Rise Before Earnings

Date: Monday 01st 2008f December 2008 05:42:16 PM

Why Share Rise Before Earnings - 09/28/2006

By: Hari Wibowo

Today, I would like to say one anomaly regarding stock price and fundamentals. Namely, stock price will rise first when new management is announced and then, it never looks back. I will dissect two examples for this case; Hewlett Packard Co. (HPQ) and most recently Radio Shack Corp. (RSH).

Hewlett Packard Co. (HPQ). On March 29 2005, CNN Money reported the appointment of Mark Hurd as the current CEO of Hewlett Packard. At the time share price rose 10% to $ 21.78 while there was yet any concrete plan from Mark Hurd to turn HP around. The share never looks back. Today, it traded at $ 36.81 a piece, a 72% rise even after the announcement of Mark Hurd as the new CEO of Hewlett Packard. Prior to Hurd's appointment, Hewlett Packard has struggled mightily from its failed acquisition of Compaq Computer and fierce competition from Dell Computers (DELL). Lo and behold, Dell stumbled on its own mistep and Hewlett Packard manages to cut cost while improving operations and share price gets a boost as a result.

RadioShack Corp. (RSH). Similar to Hewlett Packard, RadioShack was struggling as it tried to replace its wireless provider from Verizon Wireless to Cingular and Sprint. Also, there was questioning regarding the resume of David Edmonson, the-then CEO. E Commerce Times reported that RadioShack installed Julian Day as the new CEO back in July 7th, 2006. That day, the share rose 23% to $ 16.96 in a single day. It has since risen to another 15.2% after the CEO announcement.

These two cases are interesting. In both cases, shares rise higher even after it rises sharply on the day of the announcement of the new CEO. I believe that both man are an excellent manager during their tenure. I am also well aware that good management can make or break a business. What puzzles me though that Wall Street gets it right to trust the appointment of both CEO. While Sears Holding was rumored to acquire RadioShack with Julian Day at the helm, the result is not yet showing for RadioShack. Meanwhile for Hewlett Packard, Mark Hurd's cost cutting and efficient targeting has bore fruit.

So, can we find similar situations on companies that change CEO whose stock price rose sharply? We have found two companies which just installed new CEOs. At the same time, share price rose after the announcement of the new CEO. Wall Street must have known something that we didn't know, right?

Sharper Image Corp. (SHRP). Sharper Image has been struggling for years. While it suffered losses for the past two years, it had quite a healthy balance sheet with decent positive net cash. On Tuesday September 26th, Sharper Image announced that Richard Thalheimer, the founder and CEO of Sharper Image, was resigning from his post. Things look bad when if you consider that at one time, same store sales plunge 28%! That is an extraordinary occurrence. Richard Thalheimer would be replaced by Jerry Levin as an interim CEO. Share price rose 10.7 % to $ 10.33 at the day of the announcement. You smell opportunity? Hmm... interesting.

Novell Inc. (NOVL). This is the stock that has gone nowhere and failed to even capture the growing popularity of Linux. On June 22, 2006, it installed Ron Hovsepian as the new CEO of Novell. At the time of the announcement, share price rose 9.22% to $ 6.55. The stock has since retreated to $ 6.10. Is this a buying opportunity? Is Wall Street's faith in Novell's new CEO warranted?

It is silly to buy companies purely based on the announcement of new CEO. However, history seems to indicate that you can make a decent amount of money by investing in CEO that Wall Street have faith in.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Novell Inc. (NOVL) or any other securities.

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