&l;p&g;&l;img class=&q;dam-image getty size-large wp-image-1129917088&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/1129917088/960×0.jpg?fit=scale&q; data-height=&q;515&q; data-width=&q;960&q;&g; Trust determines who gets the benefit of the doubt.
Since I published &l;a href=&q;https://www.forbes.com/sites/kenkam/2019/02/15/nvidias-ceo-has-earned-my-trust/&q;&g;Nvidia&s;s CEO Has Earned My Trust&l;/a&g;, readers have asked me for examples of CEOs who have not earned my trust. There are two I can think of, Ynon Kreiz, CEO of Mattel (MAT), and Brian Krzanich, former CEO of Intel (INTC).
&l;img class=&q;dam-image bloomberg size-large wp-image-42648928&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/42648928/960×0.jpg?fit=scale&q; data-height=&q;640&q; data-width=&q;960&q;&g; Ynon Kreiz, chief executive officer of Mattel Inc.
On Thursday, February 7, Mattel reported sales of $1.5 billion, $84 million above Wall Street estimates.
On the earnings call, Ynon Kreiz, Chairman and CEO of Mattel said, &q;the company was on its way to becoming a high-performing company and creating long-term value.&q;
Mattel&s;s shares shot up nearly 14% in after-hours trading.
Then, on Friday, February 15, during an investor day event, Mattel said sales for the first quarter of 2019 would be lower than the same quarter of 2018, and that full-year 2019 sales would be flat.
Mattel fell more than 14% on Friday.
It&s;s hard to imagine how a company&s;s value can change so dramatically in just one week on essentially no news.
Was the CEO too optimistic on his earnings call? Or is he too pessimistic now that he has seen how the market reacted to his earlier comments? I honestly can&s;t tell.
However, I will say this, my trust in the CEO has been diminished. Mattel is dealing with the bankruptcy of Toys &a;lsquo;R&a;rsquo; Us, which owes&a;nbsp;it $135 million as one of its biggest customers.
Investors will never be in as good a position to know how Mattel&s;s turnaround is going as the CEO. If we cannot trust the CEO for a straightforward assessment, that is enough, by itself, to disqualify it as a top 20 stock so I recommend selling&a;nbsp;Mattel and reinvesting the proceeds in better ideas.
&l;img class=&q;dam-image bloomberg size-large wp-image-41573499&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/41573499/960×0.jpg?fit=scale&q; data-height=&q;640&q; data-width=&q;960&q;&g; Brian Krzanich, former chief executive officer of Intel Corp.&a;nbsp;
About a year ago Brian Krzanich, then Intel&s;s CEO, told shareholders that all Intel CPUs made in the last 20 years were vulnerable to two hacks called Meltdown and Spectre, He did a masterful job of minimizing the impact of the news on Intel&s;s stock.
But, I have to say that while he was talking I wondered whether this was the reason he sold all the Intel stock he could (and still remain CEO) a little over a month before this announcement.
One of the most important jobs of a CEO is to inform shareholders of significant news that affects their investment. Because CEO&a;rsquo;s often know of market moving news, they have an obligation not to trade for their personal benefit until after such news is released to the public.
To avoid trading on inside information, executives set up plans, under the SEC&a;rsquo;s rule 10b5-1, which enable them to sell shares at pre-determined times in the future. The key is that the trade is supposed to be specified far enough in the future that any market moving news at the time of the trade could not have been known by the executive when the trade was set up.
Krzanich set up his plan in 2015. In 2015, 2016, and 2017, he made small sales as he disclosed he would. However, in October 2018, he changed his plan so that he could sell 889,878 shares of Intel stock leaving him with the minimum amount of shares Intel&s;s bylaws say the CEO is required to own.
We will never know for sure what motivated Krzanich&s;s sale of stock. However, the fact is Krzanich sold every share he could and still remain CEO about a month before the security vulnerabilities of Intel&s;s processors became public knowledge.
Eventhough Intel&s;s stock recovered after the news broke, I lost confidence that Krzanich would put the company&s;s interests ahead of his own during a crisis.
Tony Mitchell, my best tech manager, made the call to move our clients into AMD at about $11 last January which went on to be the best performing stock in the S&a;amp;P 500 for 2018. I am not sure we would have made this trade had it not been for our loss of confidence in Krzanich because Intel&s;s valuation and technology still looked attractive. But, I&s;m glad we did.
Last July, Intel&s;s board allowed Krzanich to resign for having a consensual relationship with an Intel employee a long time ago so&a;nbsp;this is not a reason sell Intel now.
In November, Krzanich was named CEO of CDK Global (CDK), a software provider for automobile dealerships. Before I&s;d spend any time researching CDK, I&s;d have to find a way to trust Krzanich again.
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