When a CEO Gets Fired, Does its Stock Price Rise or Fall? A Look at Groupon

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When a CEO Gets Fired, Does its Stock Price Rise or Fall? A Look at Groupon

As a day trader, I try to stay focused on the technical statistics of stocks and stay away from stocks people love to talk about. I trade stocks that follow their overbought/oversold patterns and have predictable pullbacks and bounce backs.

When technical analysis points to selling a stock, but the talk about a stock says to buy a stock, it is overwhelming. This conflicting information is precisely why I do not like to trade stocks that have a lot of talk about them. It makes for BIPOLAR TRADING. (Fox on Stocks coined phrase)

Even though I do not like to partake in Bipolar Trading, the news about Groupon’s CEO getting fired piqued my interest. Instead of trading the highly publicized stock, GRPN, I decided to investigate this question for a blog:
Q: What typically happens to a stock when the company’s CEO gets fired?
A: It depends on whether the firing was expected, how the company was performing, what the CEO severance package was, and if there was a succession plan in place. Sometimes just one of these elements at a time will create one market response. Sometimes combining two or more of these elements creates a different market response. Look at me getting all fundamental.

Here’s what happened with Groupon recently.

February 28, 2013 – Groupon earnings reports were released
1) Groupon Revenues – Analysts predicted on target that Groupon would have around $638 million in revenue.
2) Groupon Profit – Analysts predicted Groupon would make $0.03 profit per share. Instead, Groupon lost $0.12 cents per share, posting a $12.9 million LOSS. It was better than previous year’s $15 million LOSS, but Groupon is still in the red.
3) Groupon’s Other Performance Aspects – Groupon active customer count, Group Goods, Groupon’s mobile performance – all saw remarkable increases in performance.
4) What caused Groupon to stay IN THE RED and to miss expectations?
Bottom Line: Groupon’s Cost of Revenue keeps increasing to the point that does not allow it to show a profit.
5) Andrew Mason was fired

March 1, 2013 – The day after Andrew Mason got fired
1) Groupon’s stock price rose by 12.58%
Groupon close price – Feb. 27: $5.98
Groupon close price – Feb. 28: $4.53
Groupon close price – March 1: $5.10
Groupon close price – March 4: $5.42

Q: What caused Groupon’s stock price to rally so high on March 1?
A: The COMBINATION of the company performing poorly + The CEO firing. If one or the other of these two things had occurred by itself, the stock price likely would not have rallied. However, the combination of these two things caused Groupon’s price to increase on March 1.

Can this Groupon example shed light on what will happen to the stock price of other companies if they publicly fire their CEO? Let’s take a look at a few more examples before drawing conclusions.

When Hewlett-Packard’s (NYSE: HPQ) CEO Leo Apotheker got fired September 20, 2012, many may have thought the stock price was going to rise based on the fact that the company had been doing poorly and the fact that his firing came as a surprise. However, due to his hefty severance package, the stock price didn’t rally.

When Yahoo’s (NASDAQ: YHOO) CEO, Carol Bartz got fired on September 6, 2011, YHOO rallied $0.70 (5.42%.) At the close of September 6th, the stock was at $12.91. On September 7th, the stock rallied up to and closed at $13.61. Just like what happened with Groupon, Yahoo rallied because of the combination of poor performance from the company and the fact that the CEO’s firing was unexpected.

Even though I’d love to be able to day trade long on a stock every time a company’s CEO gets fired, I can’t. I need to beware of a few game changers like… if the CEO’s firing had been expected, if the CEO left with a very generous severance package, if the company had been performing well, or if there is no CEO succession plan AND I need to be aware of any combinations of these actions causing a different impact on the stock’s price.

What can I conclude about investing long-term in Groupon? I will leave that for all of the investors and long-term people to talk about.

What can I conclude about trading short-term in Groupon? I do not and will not trade Groupon because it is Bipolar Trading, meaning the technical analysis opposes the news about the stock.

What can I conclude about how to trade a stock after a company’s CEO gets fired?
Do your homework. Look at all the facts and combinations and see how stock prices have been impacted in the past. This is true if you focus on fundamental analysis to make your trade decision.

The patterns observed are:

Stock Price has risen when the CEO gets fired IF two or more of these occur:
• CEO departure was unexpected
• Company had been performing poorly
• Company had legal or ethical problems

Stock Price has fallen when the CEO gets fired IF:
• CEO departure was expected
• Company performed very well in recent times
• CEO left with very generous severance package
• There is no CEO succession plan

These are observed patterns of the past that do not guarantee what will happen in the future. It’s just part of the whole analysis of choosing to invest in a stock and deciding the direction you think it will go. Or you may be like me when Groupon’s CEO got fired…. I just walked away from it.

Many Happy Returns,
Rachel

  • Alex

    Great post! I am glad you talked about your idea of “bipolar trading.” Technical trading does not work when there are conflicting fundamentals. One stock that I like to trade is $SCLN because the stock is very predictable. It tends to be very volatile. When there is really good news the stock is overbought (10+% price increase) so I sell my shares coming out of the “overbought zone” as it looses fundamental momentum. When there is bad news the stock is way oversold so I buy ASAP because there is usually a gradual increase of the price from the initial drop. These large corrections usually happen every month or so. The stock can also be traded weekly in between large corrections because it trades flat in a very predictable range. I just use stochastics to buy and sell larger lots on a more short term basis taking 4+ cents on the dollar each trade. I am 18, started trading a year ago. Most of my investments tend to be on the less risky side. I only focus on a couple of stocks for day trading, mainly healthcare: drugs and biotech stocks. Your posts have really inspired me to do more research and learn more about the market. Keep up the good posts!

    alex

    • http://www.foxonstocks.com Fox On Stocks

      Hi Alex! Thank you for saying that my posts have inspired you to research more and learn more about the stock market. Your response and your actions are the exact reason why I write and speak on the subject…. so thanks for taking your time to let me know that Fox on Stocks is getting it done. It sounds like our trading styles are very similar and that maybe you have experienced BiPolar Trading before. It sounds like you walked away too :) Always feel free to comment and share your ideas. I love learning about stocks I’m not familiar with and I love learning from other people. I’ll definitely check out $SCLN. I haven’t traded pharmaceuticals recently because they are impacted greatly by their drug FDA approvals. But it is hard for me to resist great volatility, and way overbought and oversold indications.
      Many Happy Returns.

  • Ron

    Awesome post, you really know what you’re talking about. Personally I tend to avoid large caps because of the flood of speculators but moments like CEO firings are interesting opportunities. The same applies for hirings, so I’m curious to see how the hiring of the new CTO of Facebook (whose stock I can’t stand) will impact its stock. Keep up the great work! #TeensMakingBank

    • Rachel Fox

      Hi Ron,
      It’s so nice to hear from a member of #TeensMakingBank. What city are you in and can you get to the NYSE on the day when our TMB group of young traders and investors rings the Opening Bell?
      Good point about the hiring side of things. I hadn’t thought about that, but now that you mention it, I remembered that there was a lot of media coverage when Marissa Mayer was hired and there was a temporary bump in Yahoo’s stock price. Facebook is a tough stock to trade from every perspective. It’s so volatile, but its ups and downs almost never make sense. Hope you’re in for the Bell Ringing! Many Happy Returns.

      • Ron

        I’m in Pittsburgh so I could definitely make it, as long as I’m not hit with too much college work or baseball. When are you thinking this is gonna happen?