Michael Santoli

Which CEO Will Be Next to Talk Down His Own Stock?

Michael Santoli

Some of the cool-kid CEOs have taken to talking down their companies’ frothy-looking stocks. Is this about to become a trend, with other business honchos attempting to tamp down speculative momentum for stocks riding high on investor excitement?

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Reed Hastings of Netflix Inc. (NFLX) and Elon Musk at Tesla Motors Inc. (TSLA) each recently sprinkled some verbal cold water on true-believer investors who've propelled their stocks up 256% and 379%, respectively, this year.

In his quarterly investor letter accompanying the video-streaming company’s strong results last week, Hastings gently cautioned on the shares, trading at 100-times 2014 forecast profits: “In calendar year 2003 we were the highest-performing stock on Nasdaq. We had solid results compounded by momentum-investor-fueled euphoria. Some of the euphoria today feels like 2003.”

The stock opened strong the next day, but has since declined close to 10% from before the report, after it was disclosed that investor Carl Icahn had taken profits on more than half of his 10% stake.

Musk, the founder of Tesla and a cult-favorite tech entrepreneur, on Friday stated about TSLA shares, also near 100-times forward earnings, what to some might sound obvious: “I think that we have quite a high valuation, and a higher valuation than we have any right to deserve.” This was at least the second time Musk has noted that extremely high expectations for its electric-car company are now priced into the stock, which has lately backed off 15% from its Sept. 30 high.

While admittedly more a story of paired anecdotes than a clear pattern, the cautionary words from Hastings and Musk reflect a market that has over-rewarded a handful of anointed stocks perceived as industry-transforming growth leaders with captivating innovation stories.

Nick Colas, strategist at institutional broker ConvergEx Group, offers: “Any CEO who expresses caution about their current stock price deserves a lot of credit for honesty and a clear-eyed view that stock market hype isn’t always your friend as the leader of a public company. Of course, a CEO who does this probably has the luxury of a stock with an outsized valuation, where any near-term fluctuations don’t undermine the market’s basic confidence in the story.”

From the limited examples so far, we can sketch a profile of the sort of CEO who might next try to sober up his or her investors after a huge run higher in a company’s shares:

They would be founder/owner CEOs, in from the beginning — or very early on — on a fabulously successful concept with grand long-term ambitions for remaking large expanses of the economy.

Their recent corporate results and stock performance should be stellar, giving them ample cover to sound a prudent note — almost as a service to current and would-be investors.

Their reputations as visionary business heroes should be rather secure, enabling them to step beyond the standard boosterism surrounding their share price. One can infer a certain implicit boastfulness, in fact, in a CEO who acts as teller of straight truths to acknowledge possible excessive optimism in his stock. This strikes a stark, convenient contrast with the vast majority of CEOs now working to squeeze out decent short-term profits while buying back their shares aggressively, often regardless of how expensive they appear.

So if this is to become a trend – and of course it very well might not — where might we find the next CEO to kick some dirt in recent stock buyers’ direction? Here are a few candidates who fit the rough profile described above:

Jeff Bezos, Amazon.com Inc. (AMZN)

This is a fairly easy call, given that from before Amazon went public in 1997, Bezos has preached only the longest-term corporate objectives, stressing domination of e-commerce over decades and disdaining the need even for near-term profits. Yet with his stock up 20% in 20 days, to a new all-time high and at 50-times last year’s cash flow, this could be a decent moment for him to "under-promise" regarding immediate gratification for today’s new stock buyers.

Reid Hoffman (co-founder/executive chairman) or Jeff Weiner (CEO), LinkedIn Corp. (LNKD)

Weiner was asked as far back as 2011, not long after the professional social network went public, about its daunting valuation. He demurred, saying it was the market’s job to value his business and his to realize its destiny as the dominant platform for connecting people and businesses. The stock is up 113% this year and fetches a Netflix-ian 100-times expected profits, double Facebook Inc.’s (FB) multiple. Perhaps better than an acknowledgement of frothiness in its stock (if they even see it to be there) would be a secondary offering to widen its thin float. Linkedin reports its quarterly numbers Tuesday after the bell.

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Steven Ells, Chipotle Mexican Grill Inc. (CMG)

While not quite at a social-media stock valuation, shares of the fast-casual dining chain are rich by the standards of the restaurant industry, at 40-times next year’s earnings. They are up 75% this year and 20% since its Oct. 17 earnings report. Ells’s advocacy for mindful eating, focused on local and sustainable food sources, and his own humble beginnings as a struggling chef not long ago, would seem to make him a decent bet to express some caution on the run his stock has enjoyed – if asked.

Howard Schultz, Starbucks Corp. (SBUX)

Schultz’s run as a founder returning as CEO to save his creation is exceeded only by that of Steve Jobs. He’s an unmatched evangelist for privileging brand quality and deep connection with customers over short-term results. The market has never given him more credit for this vision, with the $60 billion-market-value company now trading at the upper fringe of its five-year P/E range. The stock, just below its all-time peak of $80, has surged more than 500% the past five years. Schultz himself sold 1 million shares at just above $57 in March. While not a red flag for the stock, given his personal holdings remain quite high, his sale suggests he didn’t judge the stock to be cheap at prices 25% lower. Perhaps he'll get such a question after reporting quarterly numbers on Wednesday.

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