When Management Makes You Want to Sell

Many investors believe the quality of a company's management team says a lot about the quality of the company. But lately, news reports have been rife with stories of corporate managers making questionable choices. Among the most high-profile is  J.P. Morgan Chase's (JPM) $2 billion hedging loss, a miscue that led to the departure of the company's chief investment officer. Other examples have been more personal, such as  Yahoo CEO Scott Thompson stepping down after it was revealed he had falsified his resume and corporate governance questions being raised at  Chesapeake Energy in relation to CEO Aubrey McClendon's compensation package.

With these and other events in the news recently, we thought it was a good time to ask Morningstar.com readers what sorts of management actions would cause them to sell a stock. Readers on the Market Insights discussion board came up with a variety of responses, with a few common themes reappearing. To read the complete thread or to add to it, click here.

CEOs in the Crosshairs
Among the most common targets were actions relating to executive compensation. TOOOINTENSE captured some of the sentiment in this post: "I am totally against stock options and excessive bonus compensation. If a management team is truly focused on company performance, then I expect them to step up to the plate like the rest of us and put their money on the table--buy the company's stock on the open market."

Gaiuslives mentioned "self-dealing by senior management" as a sore point, writing, "One would think, given the extraordinarily rich compensation packages senior managements receive, that they would devote 100% of their time to enriching shareholders--and none of it to themselves."

OnWaldenPond mentions CEOs accessibility as a strong consideration. "I listen to all the conference calls for cues. If a CEO won't bother to attend the quarterly call, I sell. It's a red flag to me. There's no way I can evaluate the company without hearing the CEO."

Some posters mentioned management turnover as something to watch. "If the company cannot retain the people which it hires--especially considering the outrageously high compensation that is common in corporate America--that suggests to me poor management decision-making ability," writes gaiuslives.

Watching for Financial Troubles
After compensation, among the most frequently mentioned red flags for readers were financial improprieties along with financial restatements "Financial restatements are probably my number-one signal to sell," says rforno.

Rlmohla lists several different warning signs, including "management with only short-term focus" and "management who do not treat employees/customers well with no focus on building good culture with a company that matches the long-term strategic view."

Other Considerations
Although many readers mentioned issues of corporate governance, others stuck to the fundamentals, including wetlands, who writes,"What would prompt me to leave or abandon a position is related primarily to the impact of the change on the fundamentals of the company. For instance, I used to have a position with  BP (BP) when the Macondo (Deepwater Horizon) disaster started. I sold my position after the security stop I had set executed. Still, volatility on price change does not necessarily make me automatically abandon my position on the portfolio. Later the company announced they would suspend the dividend and that is a no-no in my book of rules about letting go positions that reduce or cut dividends."

Another reader, rllucky, watches for how management allocates capital. "As an investor, from what I have seen, nothing is more frustrating than poor capital-allocation decisions. Instead of buying back overpriced shares and embarking on misguided acquisitions, perhaps management teams should invest in their own business by hiring more people and creating internally driven projects that increase long-term value. Layoffs at a firm is an instant red flag. For the simple fact that a growing business will hire workers to meet demand and a struggling business will downsize."

Finally, rsoba mentions relocation of a company's headquarters as a sign it's time to sell because of the added expense and disruption involved.