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In 1908, the Chicago Cubs dominated baseball, winning their second consecutive World Series title. The club continued to play highly respectable baseball until 1932: When PK Wrigley assumed ownership the team’s leadership lost its way, and the on-field results in the following 77 years were the worst in all of the major professional sports.
In 2009, the Ricketts family acquired the Cubs. Under the new leadership of baseball genius Theo Epstein, the Cubs hired veteran winning manager Joe Madden, modernized its previously antiquated operations, assembled a remarkably young and talented team and in 2016 produced the best regular season record in the league. Now playing in the World Series for the first time since 1945, there is little doubt that their new leadership’s commitment to success is producing a much brighter future.
Leadership matters. Whether in sports or in business, an organization is not just a collection of people, cash, physical property, intellectual property and other assets. More than anything else, an organization is a living entity whose success is driven by the leadership that directs these assets and leverages what these assets can produce. Not every new management team is highly capable and new leadership cannot always overcome dire strategic situations or the quagmire of a decaying industry. But without good leadership, no business can prosper for long--much less survive.
Many investors perceive leadership changes as higher-risk. But at The Turnaround Letter, we view it as exactly the opposite: Companies with poor leadership carry tremendous investment risk--sooner or later they will stumble, producing a share price effect that rarely is pleasant. However, companies with capable leadership work diligently to improve their operations and financial condition, and re-focus the organization’s resources toward more productive activities. We like the effect this has on investment risk and the share price.
Investing where there are changes in the leadership of underperforming companies has always been a cornerstone of The Turnaround Letter's investing approach. We believe this type of change, combined with an out-of-favor share price, is a tremendous source of long-term, home run stock profit.