When a CEO’s personal crisis drags down a company’s stock, it just might be a good buying opportunity. Traders may want to jump in and make some quick profits on a firm they think will bounce back but don’t necessarily care to buy and hold.
A depressed price also gives long-term investors a chance to get into a company they like for its long-term prospects.
Perhaps both scenarios apply to Medicis (NYSE:MRX). Just a few days ago, the Scottsdale, Ariz.-based maker of skin and beauty enhancement products saw its shares fall more than they had in five months after the girlfriend of the company founder and CEO, Johah Shacknai, was found dead in his beachside home near San Diego. Police are still trying to determine if her death was a homicide or suicide.
The death of Shacknai’s 32-year-old girlfriend was followed by another tragedy: the passing of Shacknai’s six-year-old son, who had suffered a head injury as the result of a fall at the home less than a week earlier. Police have given no indication that the deaths are linked in any way.
Even though Shacknai is clearly the face of the company and sets its vision and strategy, do these incidents justify a drop in the share price? David Amsellem, an analyst with Piper Jaffray thinks not, characterizing the dip as “just a little panic-selling.”
He added that it’s unlikely Medicis will see disruption in its day-to-day operations because of the company’s “very good bench strength. He has an overweight rating on the shares.
Even with the recent drop, Medicis shares are up more than 40% this year. The company sells at a price-to-earnings ratio of 23, based on trailing 12-month earnings. Last month, Deutsche Bank said it believes the outlook for Medicis’ flagship Solodyn franchise is greatly improved, adding that Medicis is well positioned for long-term EPS growth of 12%. It kept its buy rating on the stock.
As police continue the investigations, investors still may have some nagging doubts, wondering if any new information will derail the company’s seemingly outstanding prospects and cause the stock to drop further. With these concerns in mind, it’s instructive to take a look at other companies that have suffered similar crises of confidence (although none involved loss of life).
Less than a year ago, Mark Hurd resigned as CEO of Hewlett-Packard (NYSE:HPQ) after an investigation found he had a personal relationship with a contractor who received numerous inappropriate payments from the company. In the weeks that followed, the company’s shares dropped more than 17%. Savvy investors who jumped into the stock at that point were rewarded with a 28% gain on their money less than six months later. Since that time, however, the stock has retreated dramatically. This underscores the importance of digging into the company deeper if you are going to buy and hold.
In the case of Radio Shack (NYSE:RSH), the resignation of CEO David Edmonson in February 2006 was pretty much a nonevent for investors. In fact, in the days after Edmonson quit for lying about his education, the stock actually rose a few cents.
Neither Hurd nor Edmonson was as essential to the success of their respective companies as Shacknai is to Medicis. Whether that precludes picking up Medicis shares right now is for the savvy investor to decide.
