The person at the top makes a world of difference. The chief executive officer can make or break a company, and there's no more clear way to look at the worth of the CEO than when they turn around the performance of a company.
We had a good day in the averages in part because of the performance of two stocks, Cisco CSCO and Walmart WMT, which surprised us with better-than-expected numbers and bright futures for both.
Walmart's run by Doug McMillon, who was named chief executive officer in November 2013 and has led a remarkable revolution at the company. First thing he did was drop a bomb: He was going to spend as much as possible to take on and defeat Amazon (AMZN) , something that seemed pretty fanciful at the time, and he was going to do it with value, price, service and a more energized workforce, something he accomplished by offering more money per hour across the board. McMillon knew that one of Walmart's biggest weaknesses was keeping good people, and training new people is a huge expense. It was a brilliant move.
When he made these moves, he lowered the boom on profits, something that almost no public-company CEO can do. But Walmart's not just another company. It's run with the substantial input of the Walton family and they were foursquare behind McMillon's efforts.
It's not easy to take on Amazon, but from the looks of the numbers today, you get the sense that he's having some pretty good fortune, with much better than expected comparable-store-sales numbers and phenomenal 50% online growth. This company runs like the Walmart of old when Sam Walton created the colossus.
I am blown away by this man's work and I think he's still early in the process of truly taking on Amazon, as his acquisition of Jet.com, a very strong e-commerce company, for $3 billion back in August 2016 is just starting to garner big sales. Plus, we keep hearing that Amazon is going to take the grocery world by storm now that it has bought Whole Foods (WFM) . But wait a second, Whole Foods has 431 stores in the U.S. vs. Walmart's 5,352 stores. That installed base is a fabulous weapon against Amazon, and the fairly dramatic acceleration in grocery, which is about half of Walmart's numbers, should make even Amazon nervous about its food foray.
I can't tell you how unusual it is to see a large-capitalization stock -- Walmart's worth almost $300 billion -- jump 8% in a single day. But when you consider how the long game played out here for McMillon, all you can do is congratulate him for his unbelievable work and visionary efforts.
Then how about Cisco? The company, which has always been considered the backbone of the internet, had struggled to keep up with the changes that being a soup-to-nuts facilitator of internet strategies had brought. I can't say it was anyone's fault. John Chambers, the current chairman, built Cisco into the powerhouse it has become, but the company had ceased to have revenue growth. In fact, this once fast-growing tech company, and one that was briefly the world's largest after it had vanquished the competition back in 1999, had become a value play, of all things, with a ton of cash and a very large dividend, making it one of the biggest yielders in the Dow.
With growth drying up, the company appointed Chuck Robbins, the senior vice president of worldwide sales, as CEO. He immediately decided to go all in on the cloud, really taking it to those who have been nipping at Cisco's incredible built-in franchise, offering better security systems and analytics by way of some timely acquisitions.
It was immediately evident that Cisco could turn the corner after multiple quarters of no revenue growth, and two quarters ago Robbins stressed that it could be a bit before all the changes kicked in. That caused selling and you saw a rapid decline from $32 to $30. I think it stopped going down because of an almost 4% yield and a gigantic $70 billion cash hoard, lots of it overseas, that could be repatriated if Washington got its act together and offered a one-time low rate to encourage CEOs to bring about more jobs and also more return of capital. Remember, this is a pro-capital regime and there's no shame in some of the money being used to reward shareholders.
Last night, the company reported a terrific number and, more important, predicted it could grow revenues sooner rather than later, with the possibility of as much as a 3% increase. That shocked the Street and immediately caused an upward revaluation of the stock. Cisco is also beginning to get credit for its substantial cloud deferred revenue, which is giving this company a much more highly valued service component. All of its acquisitions are pointing that way and the payoff is at hand, including with security, which grew at an astounding 8%. It's taking share and taking names. Cisco may once again become a must buy if you are going to build out your internet presence. No wonder it is soaring 6% in a single day, again a big move for a $179 billion company.
These turns are reminiscent of a couple of other remarkable reinventions. Steve Easterbrook tool the helm of McDonald's (MCD) when the stock was in the $90s and viewed as a wayward fast-food joint and it's now in the $160s just a little more than two short years later. He came in with guns blazing, offering all-day breakfast, and it caused some good growth, but a year later people thought that might be all there was to Easterbrook.
Hardly. Easterbrook accomplished what many thought was impossible; he re-energized the franchisors, the people responsible for the day-to-day running of the stores, doing so with a more simplified menu with greater value, which led to an astounding 4% comparable-store-sales growth in its most recent numbers. Most food chains put up numbers well short of that.
The stock's been a horse.
We've seen other turns in big Dow stocks of late, too. Caterpillar (CAT) under Jim Umpleby and Boeing (BA) under Dennis Muilenburg have seen their stocks advance 48% and 70%, respectively, but I would be remiss if I didn't mention that Doug Oberhelman and Jim McNerney, the two previous CEOs, put both companies in a position to reap the gains in their recovering and earth-moving and aircraft sectors, respectively.
We are seeing two gigantic tests of skills in two other Dow companies, IBM (IBM) and General Electric (GE) . Right now I believe IBM is on the cusp of a turn because of its cloud initiatives and because there is a new mainframe cycle. In fact, I believe it is the last quarter of weak revenue growth. Will it lead to a turn in the stock? Difficult question given that Warren Buffett, once the company's largest shareholder, seems to be dumping stock at an aggressive pace. But you are being paid to wait with a 4% yield as we hope CEO Ginni Rometty completes her reinvention of the company as a fast-growing cloud and data analytics business.
The other one, obviously, is General Electric, where new CEO John Flannery has a huge amount of work cut out for him, something that didn't become obvious until very recently when the company 'fessed up about how badly it was really doing at a time when there were massive reassurances that things were going great guns. Can he turn it around and in what timeframe? I think if Flannery can offload GE's oil and gas business, perhaps in pieces, and sell a bunch of other flotsam and jetsam, he might have enough money on hand to split the company into several companies the way Ed Breen did at Tyco and how he is now doing at DowDuPont (DWDP) . Investors have soured on conglomerates with few synergies and this one has none of them. (General Electric and DowDuPont are part of TheStreet's Action Alerts PLUS portfolio.)
The jury's out about this one if only because I don't think anyone at the board knew how bad things were either, and there seems to be a sense that it doesn't even have to be examined and it is pointless to find out what it is and why it occurred. I think that's a big mistake because the GE Flannery inherited has to be fixed root and branch, not unlike what he did with its ailing healthcare division not that long ago.
So, remember, a successful turn requires the person at the top to truly change the culture while motivating the entire remaining workforce. They can occur, as Cisco's Robbins and Walmart's McMillon showed us today. When you can find one, they are incredibly lucrative and, as we can see, certainly worth waiting for.
