The market gets nervous when CFO’s resign, and deservedly so if you noticed what has been happening the like of Borland, Avid Technology and Discrete Logic. It seems to me, and the market, that lately a lot of these guys are bailing out at the first sign of trouble, I guess once they realize their stock options will expire worthless, and they are working for salary only. Consequently, it is no coincidence that MWAR started falling significantly upon the resignation of the CFO. INTS had started the selloff last week with a questionable quarterly report, but must have calmed analyst’s nerves in the analyst conference call, only to shake up everybody once again with the resignation of their CFO.
In stark contrast, WIND is sailing along without any such controversy, which is much appreciated by the market. In addition, many of WIND’s announcements at the ESC are just beginning to be priced into the stock.
Is the market correct about resigned CFO’s spelling trouble? MWAR’s announcement stressed the fact that Barry did not leave because of company problems. Probably that is correct and the market should ignore the resignation. Unfortunately, the resignation occurred just at the end of a quarter, before final results are tabulated, but are roughly known to the CFO. That makes it harder for the market to look the other way.
In my view, INTS had a disappointing quarter, and must be struggling internally to rationalize all their recent acquisitions. A departing CFO certainly is consistent with this likelihood, whether he departed voluntarily or otherwise. Apparently the market shares this concern.
In one or both of the situations, the market may be dead wrong. But as a pattern, learned from experiencing retiring CFO’s tens of thousands of times, especially when coupled with disappointing quarterly reports, and in my mind especially recently, the market chooses caution over valor.
Recall last week when INTS first reported its disappointing quarter. The market mistakenly decided that faltering leaders often portend softness in a sector, so the market not only punished INTS, but also WIND and MWAR almost as much. The market would have to stretch to believe resigning CFO’s is a sector problem, so WIND finally is separated, at least temporarily, from the pack.
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The rest of this post is just my own whimsical thinking about the market - and is recommended to be skipped.
I find it fascinating that the market made an identifiable mistake, not made by contributors to this thread, and may well be making more mistakes vis a vis the CFO resignations. (Although I don’t know nearly enough about the resignations to make that claim today, but others might.) That means the market it is not perfectly efficient, which is very good news indeed. But if it is not perfectly efficient, why are so many investors afraid of the market? Why do they "go with the trend", "don’t fight the market", etc.?
The answer is that in general the market works the odds much better than possible for any human being, since it has much more input data (insider and public), and is highly experienced and therefore trained at recognizing patterns and handicapping the outcome. It is only when you know the details and the logical, multi-step consequences of a pronounced, market-effecting event, that you stand a chance of beating the market. But at those times you will find the market is childlike in its approach at interpreting complicated, convoluted, human-like thought, and in these situations is easily beat.
If you agree with this view of the market, you can appreciate why the risk-averse investor steers clear of large cap companies. Only rarely will you stumble on a market-shaking event involving a large-cap company about which you can with confidence interpret better than the market. (I will never forget arguing with a friend at the absurdity of a newsletter recommendation to short IBM from the mid-seventies down to $55. At the time IBM had just worked its way into the seventies from its incredible low in the forties. The guy made the call on the basis that OS/2 was destined to go down in flames against Microsoft’s Windows, and would have to be abandoned. His facts may have been correct, but his conclusion was stupid. IBM is not going to up or down based on OS/2. Vastly more important is the price of the Japanese Yen, and therefore the price of tea in China. In other words, there is almost nothing you can know about IBM that can be nearly as important as all the other things you don’t know anything about. Nobody knows what is going to happen to IBM over the near term, and the best possible guess is the market price. The only exception is when something really exceptional happens, like CALPER forcing a special board meeting ostensibly to fix a major problem. They have only done this once that I am know about.)
Consequently, the risk-averse investor chooses to invest his assets in small, volatile companies he can understand - carefully.
Allen - Leaving for the Southwest until late next week |
