The movers have been busy lately in the corner offices of technology companies. Whether it’s Meg Whitman announcing that she’ll step down at eBay, or anxious Motorola shareholders showing the once-revered Ed Zander the door, there certainly seems to be healthy turnover in the executive suites. It raises the question: Is there opportunity for investors in such change?

Cowen & Co. chief tech strategist Arnie Berman addressed the issue with a February 12 report, Regime Change.  In it, he identifies the best time to buy into management change at a technology company, criticizes mere “reshufflings” of the deck chairs, and figures out which Steve Jobs has been best for Apple—the founder or the savior. Portfolio.com sat him down for a review of his key findings.

Portfolio.com: You’ve just completed an exhaustive analysis of stock price returns in technology and telecom companies that have recently turfed their C.E.O. It turns out that there is serious opportunity for upside, but only if you wait a little after the replacement, so the stock can really hit bottom. Why shouldn’t we just buy the day of the announced change?

Arnie Berman: As I was watching developments unfold at Motorola in recent months, it occurred to me that technology investors keep watching the same movie over and over again. The cast of characters changes, but these recovery stories all seem to share the same script. Ousting the C.E.O. is a key part of the each movie.

Each film starts the same way. A prominent company’s products stumble in the marketplace. Market share slides and financial performance suffers. Shareholders begin to agitate. The board of directors loses patience and ousts the C.E.O. . The stock rallies in response, and then fades. A successor C.E.O. is named.

In his first financial conference call with investors, the new C.E.O. paints a despairing picture. The company’s condition is messier than investors were previously led to believe—the hoped-for recovery will be delayed. The shares establish a new multi-year low before finally hitting bottom.

But under new leadership, the company gets un-stupid—taking action on several fronts over the next twelve months. Headcount is reduced. Manufacturing processes and inventory management are made more efficient. The stock price more than doubles from its lows.

Short answer: If investors buy the day that a reviled C.E.O. is ousted, or even the day a worthy successor is named they risk getting involved too early—just as the plot is about to thicken.

Portfolio.com: Okay, that makes sense. But how does one know when a stock has actually bottomed?

Berman: There are certain signals in the script that suggest that a bottom is close. Horrible financial results, kitchen-sink guidance, or big write-offs that occur two to five months after the new C.E.O. comes on board are all clues that a bottom is near.

In our analysis of 34 different companies in which a C.E.O. left under duress and was replaced by an outsider (or at least not a longtime insider), share prices appreciated an average of 117 percent in the 12 months subsequent to the post-honeymoon low. With those kinds of returns, investors that purchased anywhere in the rough vicinity of a bottom did quite nicely.
 
Portfolio.com: Assuming we can pick the bottom with any accuracy then, what’s the best return an investor could have made after buying when a tech C.E.O. was shown the door?

Berman: Investors that purchased chip equipment makerLam Research in 1998—several months after the incompetent Roger Emerick had been thrown out and replaced by the extremely capable Jim Bagley (who had been one of the head honchos at Applied Materials) enjoyed stellar returns—with the stock appreciating seven-fold in the twelve months after the post-honeymoon low was put in.

But from my standpoint, I’d rather look at this framework in terms of the ‘typical’ or ‘average’ experience than by looking at the ‘best’ experience. The 117 percent average return I mentioned before is a robust statistic. In other words, the mean result is not wildly distorted by outliers that cause the “average” behavior to be very different than “typical” behavior. In only five of the 34 situations that we examined did shareholders not enjoy annual returns of at least 25 percent after the regime change low.

Portfolio.com: Okay, but it can’t always work. When did investors get completely burned when they bought in anticipation of some sort of turnaround?

Berman: Investors got badly burned in three of the 34 situations we examined: When Terry Semel replaced Tim Koogle at Yahoo in 2001, when Gil Amelio replaced Michael Spindler at Apple in 1996, and when Murray Goldman replaced Mark Allen at Transmeta in 2001.

Portfolio.com: You point out that the greatest opportunity for upside in C.E.O. change is when the possibility of “revolutionary change” is on the table—when the C.E.O.  was forced out and replaced by an outsider. Mark Hurd taking over from Carly Fiorina at Hewlett-Packard is the most obvious example of this. What are some other examples where this strategy delivered solid returns?

Berman: HP is the preeminent example this decade. In the 1990s, it was I.B.M.’s ouster of John Akers and his replacement by Nabisco’s Lou Gerstner. Ironically, investors also enjoyed excellent returns after Carly Fiorina was hired by H.P. in 1999—and when Motorola’s recently ousted C.E.O.  Ed Zander was hired in January 2004.