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Pain for Gain: 2 Stocks Whose CEOs Left Without a Clue

Stocks to watch

There has been a litany of CEO removals in the past year. Some of the headliners include the removal of The Walt Disney Co. (NYSE: DIS) CEO Bob Chapek in November 2022. The abrupt resignation of Discover Financial Services Inc. NYSE: DFS) CEO Roger Hochschild in August 2023 shocked investors. More recently, two companies have reported abrupt removal or resignations of their CEOs with a tenure of 30 years and eight months, respectively.

Consequentially, the underlying stocks of these companies collapsed upon the news and continued to sell off from the uncertainty these actions created. Investors are left to ponder if these events are harbingers of devastating news to come. In selling off, value investors may start kicking the tires as the market may have overreacted, as it tends to do.

Both stocks have extremely oversold momentum readings, implying short-term pain for potential gain on the rebound.

Planet Fitness Inc. (NASDAQ: PLNT)

Planet Fitness is a no-frills national gym chain with over 2,400 locations and over 18.1 million members in the United States. Memberships are as low as $10 per month with no contracts. Most gyms are also owned and operated by franchisees, making it an asset-light company. The company plans to grow its locations to over 4,000 gyms.

Business as Usual

On Aug. 13, 2023, the company reported Q2 2023 earnings of 65 per share, beating analyst estimates by 10 cents. Revenues grew 27.7% YoY to $286.5 million, beating estimates for $252 million. Guidance was mixed for full-year 2023, EPS is expected to rise around 34% to $2.20 versus $2.16 consensus analyst estimates. Revenues are expected to rise 12% YoY to $1.05 billion, matching estimates.

Unexpected Removal of CEO of 30 Years

On Sept. 13, 2023, the Board of Directors for Planet Fitness removed its CEO of 30 years, Chris Rondeau, with no explanation. Board Member Craig Benson replaces him as Interim CEO as the company searches for a new permanent CEO through a leading search firm. This sent shares collapsing 16% the following day as it lost more than 30% in the following days. The abrupt removal was especially worrisome since the Board didn't yet have a permanent replacement, which implies urgency in his removal.

Abrupt Removals Spawn Suspicions

At Disney, the Board had already contracted a replacement CEO in secrecy before the dismissal of Bob Chapek, which implies the act was premeditated and thought through. However, when a company removes a CEO without a permanent replacement, it implies urgency in the removal, which also raises concerns about what news may unravel in the future.

The Board said it was time for new leadership and brushed it off. They also mentioned that it was not a result of any material or unexpected financial events. Highly suspicious. This puts the Board of Directors' credibility on the line should negative news get unveiled. Its Q3 2023 earnings are expected to be released on Nov. 7, 2023.

If the company announces a new CEO with a strong pedigree beforehand, it can lift shares into the earnings report. It can also help to put in a bottom for the stock.

Analyst Downgrades

Many analysts chimed in on the CEO's removal. On Sept. 15, 2023, TD Cowen cuts its rating to Market Perform from Outperform with a $55 price target. On Sept. 18, 2023, Jeffries cut its rating to a Hold from Buy and cut its price target significantly from $90 to $56. On Sept. 19, 2023, JP Morgan cut its rating from Overweight to Neutral and cut its price target from $70 to $52 per share.

Planet Fitness analyst ratings and price targets are at MarketBeat. Planet Fitness peers and competitor stocks can be found with the MarketBeat stock screener.

Planet Fitness stock chart              

Daily Descending Triangle Breakdown

The daily candlestick chart on PLNT formed a descending triangle breakdown pattern that commenced on Aug. 2, 2023, after peaking at $67.66. PLNT fell to a low of $57.90 by Aug. 21, 2023. This formed the flat-bottom horizontal trendline. Each bounce peaked at a lower high, forming the descending diagonal trendline.

Shares attempted to break the descending trendline at $60.22 the day before the CEO removal announcement. Investors were in for a rude awakening the morning of Sept. 15, 2023, as shares collapsed over 15% on the announcement to $50.

Further analyst downgrades placed more selling pressure on PLNT, falling to a three-year low of $44.62 by Sept. 22, 2023. The daily relative strength index (RSI) is extremely oversold at the 19-band. Pullback supports from here are $42.06, $40.36, $37.56 and $36.41.

Block Inc. (NYSE: SQ)

Block is a multiplatform ecosystem comprised of the digital wallet Cash app and payment processing platform Square. Square handles payment processing through various channels, including point-of-service (POS) and digital. It's a legacy business that helped to democratize POS payments enabling small businesses and independent contractors to accept credit card payments without having to apply for a merchant account number from Visa Inc. (NYSE: V) and Mastercard Inc. (NYSE: MA).

Imprint Machines to Square Readers

In the old days, businesses needed to attain a merchant business account number through a lengthy application process to accept credit card payments. Businesses evolved from standard manual credit card imprinters to POS credit card swipe terminals and machines. Square was one of the first to create a micro credit card swiper, Square Reader, that could be attached to a tablet or smartphone to swipe credit cards with magstripes. Fast forward to 2023, Square generates over 60% of Block’s total revenues.

I Quit

On Sept. 18, 2023, Square CEO Alyssa Henry abruptly resigned as CEO with no specific reason given. The abrupt nature of the resignation caused Block Founder and CEO Jack Dorsey to step in as interim "Square Head" CEO of Square. Alyssa Henry was not new to Square as she had been with the company since 2014, serving as executive vice president and head of its seller unit. She was previously a Vice President of Inc. (NASDAQ: AMZN) AWS stores services. She will leave the company on Oct. 2, 2023, noting on her Twitter feed that she will retire.

Stock Reaction

Block shares fell around 3% to $51.24 and 52-week lows on the announcement day. However, shares continued to fall another 15% in the following days. It's worth noting that the markets have been in a sell-off on inflation fears and rate hike worries in the same period. Investors would have believed that having Jack Dorsey stepping in as Square's interim CEO would have been good news, but market conditions spoke otherwise. 

Block analyst ratings and price targets are at MarketBeat. Block peers and competitor stocks can be found with the MarketBeat stock screener.


SQ stock price chart


Daily Descending Triangle Breakdown

The daily candlestick chart on SQ illustrates the descending triangle breakdown as shares tried to hold the flat-bottom horizontal trendline until its breakdown on Sept. 8, 2023. Shares could not bounce back through the flat-bottom and eventually collapsed further, accelerating the sell-off from the Sept. 18, 2023, news of the Square CEO's departure out of the blue.

Weak macro market conditions kept selling pressure heavy on SQ as it made new 52-week lows. The daily RSI is extremely oversold at the 18-band. Pullback supports are at $42.33, $40.49, $38.01 and $36.11.

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