CEO’s Responsibility

I wrote an a short post Great Job Bob!, this is a responce to to reader's comments on that post. 

CEOs Responsibility

I wrote an a short post Great Job Bob!, this is a responce to to reader’s comments on that post. 

You wrote about Home Depot (HD):

“…need to separate between the analysis of a company and a stock?”

Who are you kidding with this philosophical dribble? The CEO is ‘directly’ accountable to share holders for value, hence the generous compensation. To claim the stock was “overpriced” since 2000 is laughable but not laudable.

Before you suggest (again) a bonus for “ole Bobbie” consider the shareholders’ ROI…or would that be “just plain silly?”

Scott

Scott,

A CEO’s responsibility is to create shareholder value. But a CEO’s job is to achieve that through earnings and increasing the moat around the increasing return on capital, growing business; not through stock manipulation. In the late 1990s, Home Depot’s stock was overpriced – that is not CEO’s fault. Even if Bob Nardelli was the CEO then (though he was not), the blame goes to overexcited investors. The CEO was not the person who drove Home Depot’s stock to ridiculous valuation – investors were.

In addition, Home Depot’s, as well as Lowe’s (LOW) stocks trade at low valuations (P/Es in the low teens), not because of their respective CEOs’ wrong doings but because investors are concerned about how the fallout of the housing market will affect their earnings. I have not done enough analysis on either Home Depot or Lowes to have an opinion on whether or not these fears are already more than reflected in the price of the home improvement stocks (often when everybody knows the reasons why NOT to own the stock, great investment opportunities are created). But again those fears are not the CEO’s doing.

Yes, you have to learn how to separate a good company and a good stock, a good company becomes a good stock at a certain price, not at every price. For instance, look at a company I’ve written about many times in the past, Jos. A. Bank (JOSB). I believe it is a great company and a great stock at $30 (today’s price), but if tomorrow it started trading at $500 (100 times my approximate 2009 best case EPS estimates) it would still be a great company, just not a great stock.

If investing was only about buying great companies at any price, then it would be a walk in the park, you’d identify great companies and buy them at any price. The trick in investing (at least how I see it) is to identify great stocks – great companies that are mispriced (trade below their intrinsic value).

Should Home Depot board give Bob Nardelli a bonus? Well, I’ve been facetious with that recommendation. However, any way you slice and dice the company’s operational performance (his core responsibility), since he took over he’s done a terrific job of creating shareholder value.

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