On Thursday October 3rd, HCP announced (link here) that it was replacing CEO James Flaherty (55) with board member Lauralee Martin (62). Although Martin has an impressive resume as CEO of the Americas for Jones Lang LaSalle, the surprise announcement caught investors off-guard, leading to a 6.5% selloff in the stock between Wednesday's close of $41.77 and Friday's close at $39.05.
In a prior research note published Monday (link here), we noted that Martin brings a strong skill-set to HCP, and the CEO change in and of itself should not be a reason to trade out of the stock. In particular, we said that HCP's stock price was likely to make up a lot of the lost ground by the time it got through the 3Q earnings call (scheduled for October 29).
Regardless of whether there's been a fundamental change at HCP because of the CEO change (we don't think so), the trading pattern of the last several days is a textbook example of why it rarely pays to dump stocks on sudden headlines. Seasoned investors know there is headline risk lurking in every stock, and just because it hasn't surfaced lately doesn't mean it won't happen tomorrow. A sudden change in CEOs is never easy, and the knee-jerk reaction of course is an immediate "sell." The problem with that strategy is that it's rarely the right short-term trade, and a lot of ground ends up being recovered once the market begins to think it through.
Advising investors to "dump" HCP at Friday's close (as this article does here) is a case in point. As compared to Friday's close of $39.05, HCP has already recovered almost half the absolute loss and closed Tuesday at $40.16 (considering that the S&P 500 itself is down 2.3% from last Wednesday's close, HCP is now down only 1.6% versus the index). If you are going to sell individual stocks every time they fall out of bed by 6.5%, you are going to have severe absolute and relative underperformance. This is the classic mistake made by retail investors and one reason why they often underperform the market.
It is foolish to think that you can predict which of HCP, Ventas (VTR) or Health Care REIT (HCN) will give you the best performance over the next 10 years. They are each large-cap healthcare REITs, have diversified real estate portfolios, good credit ratings, and each is a member of the S&P 500. A far better approach is to simply take whatever healthcare REIT allocation you have and spread it evenly across the three companies. That way, it's easier to stay in the market and ride out the inevitable ups and downs.
Income stocks like HCP, VTR, and HCN only work over time. Eating a 6.5% short-term trading loss is not the way to play the sector when annual dividend yields are only 4 - 6%. The better strategy is to diversify your allocation among a number of stocks, don't over-react to headlines, and let time do the rest. As for HCP, we'd continue to hold.