Can a Picture of the CEO Predict Stock Performance?
Earlier this fall a noted author, Michael Lewis, talked about an interesting investment strategy on CNN's Global Public Square. Lewis discussed his Moneyball book and the theory that people make misjudgments when they rely too much on their eyes instead of numbers and hard data.
Lewis mentioned that this theory also applies to investing in stocks. Staff of Oakland A's, the baseball team that is in the focus of the book, noticed that 60 percent of Fortune 500 CEOs are white males who are at least 6 feet tall. The people at the Oakland A's office figured that the chief executives who do not match the aforementioned description “have to know what they're doing because they don't look right.” Hence, they were only going to invest in companies whose CEOs do not look right.
In the interview, Lewis mentioned that these portfolios did very well and ended up being “very Buffett-like” portfolios. This is an interesting point right after we have seen tall white males, such Jon Corzine destroy MF Global (OTC: MFGLQ) without knowing where approximately $1 billion of the clients' money disappeared.
Benzinga listed four Fortune 500 companies that might be good additions to your portfolio, since their CEOs “do not look right.”
1. PepsiCo (NYSE: PEP)
Market Cap: $101.2 billion
CEO: Indra Nooyi
PepsiCo is a global food, snack and beverage company its brands include Quaker Oats, Tropicana, Gatorade, and Lay's. The current Indian-born CEO, Indra Nooyi, has been leading the company since October 2006. The stock is trading flat since her promotion, over performing S&P 500 that is down 10 percent since October 2006.
2. Merck & Co (NYSE: MRK)
Market Cap: $110.2 billion
CEO: Kenneth C. Frazier
Merck delivers health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products. CEO, Kenneth C. Frazier was appointed on January 1, 2011. The stock is up 0.33 percent year-to-date, slightly over performing the S&P 500 index that is down 3 percent YTD.
3. Hewlett-Packard Company (NYSE: HPQ)
Market Cap: $51.55 billion
CEO: Kenneth C. Frazier
Hewlett-Packard is a provider of products, technologies, software, solutions and services to individual consumers, small- and medium-sized businesses. Meg Whitman was appointed as CEO on September 22, 2011. Since then, the stock is up about 8 percent out performing S&P 500 that is up about 4.5 percent during the same period. HP's good stock performance during Whitman's tenure might be partially caused by the investors' excitement over the departure of former CEO, Leo Apotheker, as the company was significantly underperforming under his leadership.
4. Citigroup (NYSE: C)
Market Cap: $75.87 billion
CEO: Vikram Pandit
Citigroup businesses provide consumers, corporations, governments and institutions with a range of financial products and services. As of December 31, 2010, the Company had approximately 200 million customer accounts and did business in more than 160 countries and jurisdictions.
CEO, Vikram Pandit, was appointed on December 11, 2007. After his appointment, Citigroup stock is down whopping 90 percent. During the same time period, S&P 500 is down slightly over 15 percent. For comparison, Financial Select Sector SPDR ETF (NYSE: XLF) is down 60 percent since Vikram Pandit was appointed as the CEO of Citigroup.
The point of this article is not to argue that the tall white male CEOs are poor leaders. In fact, many of them are incredibly successful and, for instance, Alan Mulally has done a splendid job in turning around Ford (NYSE: F). One good way to keep track of what the chief executives are doing is to take a look at Benzinga Pro's exclusive CEO comments.
Traders who believe that the CEOs who “do not look right” outperform their peers might want to consider the following trades:
- Go long the companies listed in this article.
- Short companies, whose CEO “looks right.” Microsoft's (NASDAQ: MSFT) Steve Ballmer is a good example.
Traders who believe that the CEOs from the minority groups do not perform any better than the CEOs who “look right” may consider alternative positions:
- If you believe the large companies appoint CEOs for their qualifications and not for their looks, you may want to go long SPDR S&P 500 ETF (NYSE: SPY).
Personal disclosure: Long PEP (held over 30 days).
You can follow me on Twitter @TuomoKallio
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