Media accounts update almost daily the speculation around the timing of Alan Mulally's departure. Waiting until a resolution is public and defined is a reactive investment strategy. Most retail and institutional investors will either miss upside opportunities or pay the price on the downside. Reading the tea leaves of public comment alone is not a successful strategy for the Ford (F) investors not committed to buy and hold. Careful analysis shows five qualitative and technical signals that indicate Mulally is more likely to leave than serve out his term, and that there will be a significant price drop upon the public announcement.
1. Board Dynamics Do Not Instill Confidence Mulally Will Stay
Alan Mulally, the CEO of Ford, has recently confirmed his commitment to staying at Ford deep into 2014. The Ford board of directors, as recently as Dec. 13, 2013, has shown concern and uncertainty around Mulally's plan. Meanwhile, the Ford board has expressed a comfort level with him leaving earlier. Even the board is uncertain and wants an answer from their CEO. A public board comment of this sort does not instill in shareholders a sense of comfort that there is harmony in the boardroom. The public discussion of timing, the lack of a specific 2014 departure date, the separate messaging from the board vs. the CEO to the media, and the lack of strong, absolute statements from the CEO all point to an earlier and surprise departure. Furthermore, there are no consistent signals of long-term succession planning being an institutionalized part of governance. Other Dow 30 companies like Berkshire Hathaway (BRK.B) or General Electric (GE) have set investors' expectations for well managing planning and messaging.
2. Benchmark of Price Behavior at CEO Transition
What is the short-term effect of waiting for the stock price effect of a CEO departure? This account lists a consistent, significant, negative price drop on CEO departures. Here is a sample, with the company name followed by stock % change on the announcement:
- Research in Motion (BBRY) (-9.1%)
- Urban Outfitters (URBN) (-15%)
- Best Buy (BBY) (-5.87%)
- Akamai (AKAM) (-6%)
While these are not automotive stocks, they cross industry verticals. History shows one can expect a short-term price drop. When prices rise on transition, it can be due to perceptions, faith, and excitement around the incoming CEO. These more often result in cases where the incoming CEO has industry and CEO experience and is widely known. The third reason to prepare for a stock drop is the prevalent media volume focusing on the speculation of Mulally's intentions, as opposed to focus on incoming candidates.
3. Longer-Term Downward Pressure on Ford Stock Price
Historical data tells one to expect a short-term price drop. What about in the longer term? Once investors have a chance to become comfortable with a new CEO, there are still reasons to expect continued downward pressure. First, an excellent study was performed by FTI measuring dynamics of CEO change on stock performance. From this study:
When CEOs change, investors are more than twice as likely to sell shares in a company as they are to buy them. All things being equal, nearly 40% of investors said they would sell a stock solely on the basis of the new CEO, the FTI Consulting survey found, while only 15% said they would buy the stock on the same basis.
Second, the Ford stock price has shown a willingness to trade within a range. This range-bound behavior shows a conspicuous correlation with the timing of Mulally departure speculation. If positive Ford and sector fundamentals cannot outweigh -- for multiple months -- CEO departure speculation, how will they outweigh the uncertainty of a new CEO and a lack proper transition planning?
4. Insider Buying and Selling
Insider buying and selling shows a preponderance of selling vs. buying:
Click to enlarge images.
Even if one ignores the Ford family sales -- which may be part of planned, consistent sales, there is at least a 12:1 ratio of insider sales to purchases from 8-2-13 to 12-13-13. This alone is a huge signal that "smart money" is not treating the current prices as a buying opportunity.
5. What Ford Stock Technicals Say
The Ford stock price's range-bound behavior is conspicuously correlated with speculation over Mulally's departure. The lack of Ford's ability to track increases in the S&P 500 index is obvious, and has been costly to Ford investors. Speculation began in August 2013.
First, compare the relative strength of Ford (88th percentile) in 2013 to Aug. 1.
Note the following:
- A relative strength of 88th percentile within its sector
- A consistent ability to stay above its 50-day exponential moving average (EMA) and to stay at the top of its Bollinger Band
- More up days (shaded gray in the volume bars) than down days (shaded red in the volume bars)
Now, look at the same stock chart from 8-2-13 to 12-13-13.
Note the following:
- There is a recent bearish crossover. The 50-day EMA below the 10-day moving average.
- The relative strength of Ford within the sector is 44th percentile, vs 88th percentile prior to speculation of Mulally's departure
- More down days (shaded red in the volume bars) than up days (shaded gray in the volume bars)
- Relatively wide Bollinger bands show some elasticity toward variance up and down, presumably based on media reports, emotionality, or other events-predictive that upon actual news of departure, the stock will swing
The Counter Case
Counter arguments to the case put forth include:
- Mulally has publicly stated his intention to stay well into 2014.
- The media's penchant for 'finding a story' where there may be none means the drama is overblown -- the likely outcome will be less spectacular than the media hopes for.
- The long timeframe for investors to become comfortable with a new CEO means downside will be more likely priced into the stock when the departure comes.
- The stock price's range-bound behavior could be considered a consolidation, shaking out the future sellers. As such, on a transition, the slope of increase will be much higher as the sellers have had plenty of time to exit.
- The current strong bull market will provide increased support for any Ford stock weakness to the downside.
Overall, Ford investors should at least remain very cautious. The qualitative and technical signals point to more downside than upside. Technical weakness exists along with public and insider negative behavior. There are few qualitative signs Mulally will serve out his committed term. It appears the current news and technical situation has led to a set up for a sharp drop and continued weakness on a Mulally departure.
Sources: WhaleWisdom.com, Stockcharts.com, FTIConsulting.com.