Management Matters: Be Careful Investing in these Companies

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There is perhaps nothing more important to the long-term direction of a stock moreso than management. Over the years I have discussed in detail how and why management is important both fundamentally and psychologically to the performance of a stock. If you don’t believe me just look at the debacle of Ron Johnson at J.C. Penney or the success of Bradley Jacobs and Steve Jobs at XPO Logistics and Apple. The truth is that one leader can make or break a stock, and although the following three companies are currently making headlines, I am not sure that I would touch any due to their management.  

Tempur-Pedic International (NYSE: TPX)

If you owned shares of Tempur-Pedic on Wednesday, and held throughout Thursday, then right now you are enjoying a nice return on your investment. The stock traded higher on Thursday by 9% thanks to a short squeeze, and then was squeezed even harder after the market closed when it rallied 13% by posting better-than-expected earnings. The stock has declined almost 40% in the last year, but now could be a favorite of retail investors following its encouraging quarter.

While you may be attracted to the prospects of an investment in Tempur-Pedic, it wasn’t long ago that investors lost over half of their investment in TPX following a complete debacle by the company’s management. Back in June, after posting years of growth and guiding for years of future growth, the company abruptly cut its revenue forecast by 3-5% and cut EPS guidance by an unprecedented 50% because they did not see nor judge a steep change in demand!

Today, Tempur-Pedic doesn’t look much better: The company’s net income declined 58% over the last year and they guided for earnings to be below the consensus. Yet still the stock is trading higher in after hours. It makes little sense, and to this day it still concerns me of management’s incompetence back in June, not seeing a 50% decline in EPS sooner. Therefore, I urge investors to approach this stock with caution, because who knows what management will say next!

Travelzoo (NASDAQ: TZOO)

Travelzoo traded higher by 24.31% on Thursday for the most unwarranted rally of the day. The rally was a result of earnings, but judging by its performance you’d think the stock was either massively undervalued or that earnings reflected incredible growth. However, with a price/sales of 2.03 and a forward P/E ratio of 19.41, Travelzoo is a fair value stock in the internet space. Furthermore its revenue growth of 3% is nothing to brag about and is near the industry bottom in terms of growth.

Despite my beliefs that Travelzoo shouldn’t have traded higher on Thursday, the stock has greatly underperformed its industry and was well positioned for a breakout after months of flat trading. But, much like Tempur-Pedic, I just don’t trust the management of this company.

Think back to June 2011, the company had come off its all-time high of $100 and CEO Christopher Loughlin was touting his company on Mad Money by saying that they were growing as fast as possible, among other appearances. Meanwhile, Ralph Bartel was selling shares as fast as possible, nearly 2.5 million shares for an average price of $76.55! When it comes down to it, I really can’t blame Bartel: He made almost $200 million off this company at its peak, meaning he was a smart investor that was selling as the CEO was pumping. But as a result, I consider the company very dangerous and have a hard time believing in its re-emergence or in the legitimacy of management’s excitement for its future.

Mellanox Technologies (NASDAQ: MLNX)

It’s always tough to swallow your pride and admit that you were wrong, and that’s exactly what I was, wrong about Mellanox. I defended the company after its last quarter when it fell 25% for missing earnings by a couple million bucks. The company has always been a rapid grower; therefore, I viewed its fourth quarter revised guidance as a good opportunity to buy a great company.

A couple months ago Mellanox came out and lowered guidance due to a technical problem and lower demand, but insisted that the problem would be fixed, and would not be long-lasting. Therefore, I was shocked when the company once again issued horrible guidance, 40% below consensus, on Wednesday, saying one of its largest customers saw a $30 million inventory buildup. As a result, the stock slid lower in after hours trading but remarkably recovered throughout the day on Thursday.

I find this price action to be incredible, as investors continue to trust this company. Think about it, they suddenly lowered guidance for the fourth quarter because of a one-time issue, and then turned around and did it again on Wednesday for this upcoming quarter for a different reason. Therefore, my question becomes, can you trust this management? My answer is finally “no,” and trust me, I have tried to trust this management. But there comes a time when you have to step back, look at the company, and admit that perhaps the problem is with demand, and maybe the quarters of 100%-150% growth are long gone.

Conclusion:

In my new book, Taking Charge With Value Investing, I talk thoroughly about unmeasured fundamentals, and explain in detail why successful management, and honest management, is one of the most important factors in finding a good investment. Each of these companies have given us three different ways that management can ruin a stock: Whether they suddenly and abruptly cut guidance in half due to the inability to foresee changes in demand; aggressively sell shares while promoting the stock; or slowly but surely cut guidance over a course of several quarters. These are all major problems for investors, and if you invest in a company with management that partakes in these actions (such as these three), then you need to be very careful. 


BrianNichols has no position in any stocks mentioned. The Motley Fool owns shares of Tempur-Pedic International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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