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Why Shares of KEYW Holding Corp. Stock Are Breaching Downward

By Nickey Friedman - Mar 24, 2014 at 11:29AM

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KEYW Holding Corp.’s downward move is based on an uncertainty development.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What?
Shares of cybersecurity company KEYW Holding Corp. ( KEYW ) were hacked over 10% recently following the resignation announcement of CFO John Krobath.

So what?
Krobath will be resigning on April 25 on more than one month's advance notice. The company expects to have a replacement before then to allow a "smooth transition."

CEO Len Moodispaw attempted to calm any market concern. He stated, "John has played a critical role in the success of KEYW and I express my gratitude for his five years of dedicated service. John made significant contributions to the growth of KEYW including the negotiation of many of our acquisitions and two successful equity offerings. I wish him all the best as he moves on to his next opportunity." It was all a bit generic sounding.

Now what?
There are several problems here that may be spooking investors which warrant Fools to exercise some caution.

First is the obvious. It's never a good sign when any executive resigns, let alone the CFO, without a successor already in place. The reason given for this one is "to pursue other professional opportunities." If KEYW was going to announce a fantastic quarter, you would think Krobath would want to stick around a bit longer. The market hates uncertainty, and this departure raises an eyebrow at the very least.

Second, missing from the press release were any positive comments from Krobath himself. Usually when an executive leaves on good terms, his comments will be included in the departing press release stating that he will miss the company and expects great things or something along those lines. None of that was there. Even the comments from Moodispaw made no mention of the company or other executives expecting to miss Krobath. While it does acknowledge Krobath's past accomplishments, it says nothing positive about what he's been doing lately.

Third, the SEC filing that came with the press release contained nothing reassuring in it that investors typically look for. There was none of the customary language stating that the resignation "was not the result of a disagreement relating to the Company's strategies, operations, policies or practices." This language is important especially when it comes to a CFO resignation since this is the ultimate head of the financial statements and the SEC filings.

It could be something minor from an investment standpoint. Perhaps Krobath simply got into a heated argument with another executive and didn't want to work with him or her any longer. Maybe there was a disagreement over a positive development. Maybe the company is actually doing far better than everybody expected and there is a power control issue.

These are examples of how the resignation isn't necessary bad news. In the end we simply don't know. Uncertainty and fear of a possible new negative development that hasn't been announced has spooked the market. The perceived risk always goes up when situations like this arise. Fools should be careful.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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