Betting on a CEO

By Daniel Kadlec

Everyone from Peter Lynch to your barber will tell you that before you invest in a company's stock, you should make sure it has great management. The best managers are agile enough to steer through trouble and exploit new opportunities. That's how Jack Welch at General Electric became a star and why GE perpetually trades at a higher multiple of earnings than the average stock. Welch is proven. You can buy his stock and throw it in a drawer. Ditto Charles Knight at Emerson Electric and Lawrence Bossidy at AlliedSignal.

But great managers today are switching companies more often. Buying a stock for its management has become a bit like picking a restaurant for its chef. You need to check in once in a while to make sure old Pierre is still there--and that he isn't suddenly trying to cook Chinese. Here are four questions to ask when reviewing the management menu:

--Is your favorite CEO really in charge? Sandy Weill has engineered a tenfold stock gain while at the helm of Travelers Group and its predecessor companies since the mid-'80s. But last month Travelers merged with Citicorp to form Citigroup. Weill now serves as co-CEO with John Reed in an unwieldy structure that is slowing the integration of the two companies and frustrating top deputies. Underscoring that point, Weill protege and presumed heir Jamie Dimon was forced to resign last week. The co-CEO thing won't last, and my bet is that Weill will emerge on top. But for now it's a power struggle. Shareholders may suffer. Indeed, Citigroup stock fell the day after Dimon was ousted. Consider buying the stock of the company that lands him.

--Is management suited to the task at hand? "Chainsaw" Al Dunlap drove Sunbeam's stock up fourfold last year by doing what he had done so well at Scott Paper and other firms: slashing costs. But Sunbeam's share price collapsed when he tried to push the business's growth. Two weeks ago, when CBS tapped Mel Karmazin to be CEO, replacing Michael H. Jordan, CBS stock jumped. But it wasn't so much a bet on Karmazin as a sigh of relief that Jordan was leaving. Under Jordan, CBS has run last among the big networks. But can Karmazin, a shrewd TV and radio-station operator, fix the Tiffany Network's programming? Not exactly his forte.

--What happens when the CEO retires? Michael Eisner of Disney (who had a heart attack in 1994) and Sumner Redstone of Viacom (who is 75) have clashed repeatedly with potential successors, who then left. Both stocks have done well. But shareholders will get singed if these CEOs step aside suddenly. On the other hand, when Bank of America CEO Hugh McColl last month ran off his likely successor and agreed to stay on until 2002, the stock surged.

--Does management deserve a second chance? Put Dunlap in charge of a bloated company in trouble, and I'd buy the stock. (I'd also sell it within a year.) I also believe Henry Silverman, CEO of the marketing firm Cendant, will fix things in the wake of a disastrous merger with CUC International. His may be the ultimate display of agility. Silverman is selling chunks of the company he built, which is now worth more in liquidation than its value in the market.

See time.com/personal for more on management. E-mail Dan at kadlec@time.com See him on CNNfn Tuesday, 12:40 p.m. E.T.