In recent days both Tesla (TSLA) and Papa John’s (PZZA) saw their stocks tumble for the same reason, despite the very different valuations, market sectors, and investor bases of both companies. First, news of John Schnatter using a racial slur in a conference call broke, and the stock sank. It didn’t take long for the board to oust the company’s founder and now ex-CEO, although his ousting didn’t really help the stock recover to pre-gaffe levels.
Then, shortly thereafter, a much more self-inflicted wound hit Tesla’s iconic Elon Musk. After facing criticism for his dubious child-submarine device that was ignored during the Thailand cave rescue, he baselessly called the lead rescuer a pedophile, possibly drawing on racist stereotypes. After the stock sank by over $2 billion in market capitalization, Musk apologized on Twitter, although many have pointed out, with good reason, that his apology was half-baked and still accusatory.
TSLA shares have since recovered.
There are two lessons to be learned in these different but concurrent stories. Firstly, there is clearly a risk that an outburst from an executive can cause a stock to fall. These are unpredictable events, since human beings are largely unpredictable, which means hedging against them is difficult. But one can minimize exposure by ensuring one invests in companies with good management; both Schnatter and Musk have reputations for being emotionally unstable, whereas many companies with lower valuations and/or higher growth have much more mature and stable management.
Secondly, however, is the difference in the stocks’ performance. PZZA has come near pre-scandal levels only after leaked information that the company was considering a merger with Wendy’s (WEN), which pretty much single-handedly brought the stock from its post-scandal lows. TSLA, however, has shot back up to its prior levels, and it began to do so even before Musk’s apology began.
Why the difference? It’s really quite simple: many investors are in TSLA because of Elon Musk and his vision more than anything else. That is both a risk and an opportunity; the possibility of Musk failing on his promises or having a meltdown that destroys the company’s brand value is perhaps the biggest risk the stock has, while the reward of Musk executing on his visions remains the focus of investors. TSLA shares will likely prove buoyant until investors change their attitude about its leader.
PZZA, on the other hand, has been much less about its CEO–who was powerless enough to be fired, after all—than about its pizza, marketing, and market position. For those reasons the offensiveness of Schnatter’s statement was seen as a more damaging risk and the ideas of a synergistic merger was seen as a tremendous potential reward.
While financial metrics and valuations often influence decisions to hold a stock, the recent stories show that much more human and complicated decisions are often the backbone of financial decisions, too.