Canadian Pacific Railway Ltd.’s Hunter Harrison was the highest-paid CEO in Canada in 2012.Tim Fraser/The Globe and Mail
Recognize a stock market trend and the trend disappears. That's what seems to be happening to our CEO of the Year idea, which entails either avoiding or short-selling the stock of an award-winning chief executive, on the basis that their status has peaked.
Too bad: Morningstar just announced the three nominees for its 2014 CEO of the Year. What once looked like a money-making (or money-saving) strategy is now up in the air.
The approach had looked like a sure winner, given the number of previous cases where a much-lauded corporate leader took the prize and then stumbled badly. Among them, the chief executives of Nokia Corp., Cisco Systems Inc., Research In Motion Ltd. (now BlackBerry Ltd.) and Nortel Networks Corp.
For 2013, Morningstar named Canadian Pacific Railway Ltd.'s Hunter Harrison as its CEO of the Year, "because Canadian Pacific has produced outstanding results since his appointment as CEO in June 2012. Harrison has now transformed three railroads in his career, and along the way forged a new standard of profitability in a two-centuries-old industry."
For the cynical: CP shares had rallied more than 59 per cent last year, or nearly six-times the gain for the S&P/TSX composite index, blurring the distinctions between a hot stock a strong leader.
But CP has by no means floundered since Mr. Harrison scooped up the title. The shares have surged another 39 per cent since the start of 2014, again outperforming the S&P/TSX composite index by a wide margin.
The strong gains have certainly improved Morningstar's track record (other organizations announce similar titles this time of year). If you look at the one-year share price performance the year after a chief executive wins the CEO of the Year award, the average one-year gain for the past five winners now stands at an impressive 16.9 per cent, or 3.4 percentage points better than the S&P 500 (excluding dividends).
On Wednesday, Morningstar announced three nominees for its 2014 CEO of the Year: Gergory Henslee at O'Reilly Automotive Inc., the chain of automotive equipment stores; Gail Kelly at Westpac Banking Corp., the Australian financial firm; and John Martin at Gilead Sciences Inc., the biopharmaceutical company. The winner will be announced on Jan. 21.
The three stocks have risen an average of 26.7 per cent this year. But whether that makes them stocks to avoid or stocks to buy (to be fair, Morningstar is not trying to pick stocks here) largely depends on whether you like to hop on board momentum plays.
While Westpac is an exception here – the stock has fizzled this year, and Ms. Kelly is departing – O'Reilly is up 45 per cent and Gilead is up 33.5 per cent, with longer-term gains that are even more impressive.
They're not exactly cheap, either. O'Reilly trades at 27-times trailing earnings and nearly 10-times book value. Gilead trades at a more reasonable 18-times earnings but 11-times book value.
Expectations are high. Analysts estimate that O'Reilly will produce $7.25 (U.S.) in per-share earnings this year and $8.28 next year, up from $4.75 in 2012.
In the case of Gilead, analysts estimate earnings will rise to $7.96 a share this year, up four-fold since 2012 – and then rise to $10 a share in 2015.
These companies have a lot going for them, which is why their leaders have been nominated for CEO of the Year. Just remember: they've been chosen for past performance.