Hurd's abrupt exit poses test for long-term H-P investors

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By Chuck Jaffe, MarketWatch

BOSTON (MarketWatch) -- For average stock investors, programmed to buy and hold, the one place they don't want to find their stock is leading the news reports. When that happens, the company -- and its long-term supporters -- are thrown for a loop.

The most recent case involved Hewlett-Packard Co. /quotes/comstock/13*!hpq/quotes/nls/hpq (HPQ 40.14, -0.63, -1.55%) , where chief executive officer Mark Hurd was forced to resign in the wake of sexual harassment allegations and a related internal probe over inaccurate expense reports purportedly used to cover Hurd's tracks. See related story on Hurd resignation.

It was shocking news for investors, particularly because this was no clear-cut case. It wasn't a chief executive filing misleading balance sheets and accounting statements or giving overhyped guidance to pump up shares and then trading against shareholders behind it.

It wasn't even a "Something must be wrong with the company" moment, akin to when former Enron leader Jeffrey Skilling left the company with very little news in the wind, a sign of that company's troubles to come.

This was a personal peccadillo, a matter that seemed to make H-P struggle over the right thing to do. According to a report from Larry Ellison, chief executive at Oracle Corp. (ORCL) and a close friend of Hurd's, the H-P board was split 6-4 on whether to even disclose the harassment claims. Ellison was critical of the decision to allow Hurd to go.

Whenever a stock is in the news, the people who trade it are looking for the fast move (up or down), the average buy-and-hold shareholder is wondering if they should hang on, and the outsider is left wondering whether there's a buying opportunity.

It's why a number of H-P shareholders -- not the least of them being my own mother -- got in touch over the weekend wondering what's the next move for a shareholder when a favorite company is in crisis.

"When CEOs up and resign suddenly from a high-quality company on a Friday afternoon, it just doesn't get any weirder than that," said Tom McIntyre of McIntyre, Freedman & Flynn, a money-management firm in Orleans, Mass. "But how you respond to the news -- whether it is this case or any other -- really depends on where you are coming from. If you own the stock, you wonder how much of this stuff you can really take, and you're anxious that your long-term success is now in jeopardy. If you don't have it, you don't have the emotional baggage, so it's easy to let things play out and see if you can buy a blue-chip name cheap."

"Playing this one out" means not rushing to snap judgments on snippets of news.

Because the Hurd situation is about interpersonal relations, details are sparse. While there is a temptation to focus on the sensational aspects of the story, what matters to shareholders is what happens next, as well as their personal situation and the kind of long-term profits they might be sitting on.

Long-term H-P investors can recall that Hurd got the top job in April 2005, when the company needed to get its financial house in order because it was still choking on its huge 2002 deal to buy Compaq. That deal was engineered by Carly Fiorina, who Hurd replaced because the board was unhappy with H-P's performance.

Known for his attention to the operations side of the business, Hurd set some difficult goals, and then went out and reached them. And H-P's financial ship was righted in the process.

Long-term holders

For someone who has ridden with the company from Hurd's arrival -- when H-P shares were trading in the $20s, they have doubled their money, even after the stock lost about 20% off of its 52-week high. They may be willing to ride things out longer, and not rush into a capital gain.

Indeed, investors need to guard against knee-jerk reactions in both directions. H-P supporters will say that Hurd's actions didn't truly affect the balance sheet, so that the company is unchanged except for the top dog; critics will note that change at the top trickles down to many different levels. And Fiorina's detractors will certainly attest to the fact that not every H-P leader has been equal.

For someone who picked H-P well into Hurd's tenure, they have less gain to protect, and more concern that they should sell out now.

And for any average investor looking to for a bargain, it's always a big risk to buy a company where the management amounts to a blind pool. Hurd could be replaced internally, or they could go outside; it's an open question how much of his team will stay in place.

"You'd be buying it blindly right now, not knowing if they'll hire someone who is likely to shake things up, take a lot of write-downs or whatever, they could got for the next 'Chainsaw Al' [Dunlap, a one-time corporate takeover artist known for slashing the operations of any firm where he went to the helm]," said Brent Wilsey of Wilsey Asset Management in San Diego, Calif., who noted that investors not only would have worried about Dunlap's presence, but that his reputation ultimately was ruined in an accounting scandal at Sunbeam-Oster.

"H-P is a solid company, so if they hire someone who isn't very good to take over, it will take that person a while to destroy the company," he added. "You'd like to think that won't happen, but you watch the numbers and see how the changes play out over the next six or nine months. That's a better way to decide rather than just reacting to the current headlines."

Chuck Jaffe is a senior MarketWatch columnist. His work appears in many U.S. newspapers.

Chuck Jaffe is a senior MarketWatch columnist. His work appears in many U.S. newspapers.