Listening to CEOs Often Means Destruction of Your Nest Egg

Margie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I believe that many investors pay way too much attention to the guidance of CEOs appearing on CNBC.  I see them time and time again come on screen and perform a cheerleading song and dance about their company, often painting far too rosy a picture, and intentionally or not, misleading investors.

Stock options generally represent a substantial portion of the CEOs pay. In some cases like Larry Page and Sergey Brin of Google (NASDAQ: GOOG) it represents all but $1 of their annual income. 

Therefore it is in the interest of the each Chief Executive Officer to keep the price of their company's stock high, even artificially in some cases so that:

1) he/she is able to cash out the other options and make a killing, other shareholders in the company be damned.

2) a high stock price obviously increases morale amongst workers also paid in stock options, making it easier to keep talent.

3) The CEO is obviously much more likely to retain their job, and the numerous perks that go with it.

4) the overpriced stock can be strategically used as an asset in making acquisitions of other corporations.

Therefore I take most of what CEOs have to say with a grain of salt, understanding it is not in their interests to be totally honest and objective about their company's prospects. Allow me to give you some examples of CEOs doing Vegas-like song and dance numbers which won't serve you to take at face value.

MGM

As long as we're talking about Vegas, let's start with MGM Resorts (NYSE: MGM) and their CEO Jim Murren who explained MGM's 3rd quarter loss, which widened to $181.2 million (37 cents per diluted share) from $123.8 million (loss of 25 cents per share) in the 3rd quarter of last year.

He answered analysts’ question in typical cheerleader fashion: “Our third quarter operating results are reflective of a challenging consumer environment, but we had some bright spots with strong results from MGM Grand Las Vegas and The Mirage and record third quarters from MGM China and CityCenter. We have achieved a great milestone with MGM China by accepting the formal land concession agreement and look forward to continuing to make progress towards a second resort and casino in Macau. Meanwhile, early fourth quarter trends are improving at our domestic resorts and forward convention booking pace is showing growth in 2013 and is further accelerating into 2014.”

As I follow the casino industry, I have listened to Murren explain away MGM's challenges multiple times. I have but once heard Jim Murren come on TV and discuss the mountain of debt his predecessor (Terry Lanni) left him, and the massive interest payments the company is faced with.  In fact, the only time I heard Murren speak of this, was stating that he would be able to get refinancing "in his sleep."

MGM has lost money almost every quarter of the last several years, and only the sale of large assets (the sale of Treasure Island Resort and Casino for instance), or some accounting, (2011's 2nd quarter $6.30 per share gain on consolidation of MGM China,) have put the company in the black in any given quarter.

However, if you listen to Murren's upbeat assessment of the company, you'd be very tempted to invest in it/ hold your shares.  Do you really want to own shares in a company that loses money every single quarter?

CitiBank

In 2008 little known analyst at the time Merideth Whitney came on CNBC and told the investing world that Citibank (NYSE: C) had badly mismanaged its mortgage operations and would need to slash its dividend in order to stay afloat.

Charles Prince, Citi's CEO at the time came on CNBC and stated that everything was fine, no cause for alarm.  One week later, Citi slashed its dividend, and its stock fell precipitously.

The same is true about Lehman Brothers who were the king of toxic mortgages. How much did Dick Fuld earn while driving his company into the ground?

I could give you more examples of the song and dance, but would rather discuss:

Mark Hurd @ Oracle and HP

Hurd used to be widely heralded as a "great CEO."  When running Hewlett-Packard (NYSE: HPQ), he improved the bottom line of the company on a nearly quarterly basis.  How did he do this?

Mark Hurd cut costs at HP, specifically crushing the budget for research and development, which the founders of the company (Hewlett and Packard) always invested heavily in.  The results were such that short term profits for Hewlett Packard rose dramatically, causing a spike in the stock price, and I have no doubt that Hurd likely cashed out near the top.

What he left in his wake was low morale at a once proud company, a pipeline starved of new products, and a stock now approaching single digits.

There is no love lost at Hewlett Packard for Mark Hurd, and indications appear to be the same now that he is #2 at Oracle (NYSE: ORCL). I have several family members who have worked for years in various branches of HP, who are more explicit in their language towards Hurd than you will find on the Internet, including in the comment section to the article I am linking to below.

Now that Hurd is at Oracle, many of its top salespeople are fleeing.  Once again Hurd is concentrating on short term profits, putting the company's resources in emphasis squarely on the company's top 2,000 clients which account for 60% of the profits.

Employees rarely leave companies that are well managed, profitable, and fun to work for.  Let's see if Larry Ellison, who by all accounts is widely admired amongst Oracle employees, stems the Hurd drain of talented employees.

Bottom Line

When Joe Terranova of CNBC says that "buy and hold is dead," I lamentably must agree with him.

There is a definite shift in the psychology of management, and its rapid continued turnover has led to more and more short term, self-centered interest rather than concentrating on the health of the company in the long run.

In today's market one must watch very closely what direction the CEO is taking the company.  If their goal is to boost short term profits, then you would be best served to sell, and not wait for the inevitable fall as the company becomes gutted as in the case of Hewlett-Packard. 

And don't give too much importance to what most CEO's tell you on CNBC.  You're much more likely to get honest information talking to mid-level salesman, management, and engineers as to the company's true future prospects.

 


margiecfl has positions in Google and Hewlett-Packard. The Motley Fool owns shares of Citigroup Inc , Google, and Oracle. Motley Fool newsletter services recommend Google. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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