One thing portfolio managers look closely for as they study earnings releases are trends or at least indications of what might occur in the future. While I am hard pressed to identify any meaningful trend coming out of the recent 4th quarter earnings reports, I do think there are a few interesting tidbits worth sharing.

Generally speaking, earnings were solid in the 4th quarter… Moreover, across most industries, corporate cash flow has never been stronger.

Despite positive fundamentals, the rise of the activist investor is at hand... What is an activist investor, exactly? Basically, it is a well-known, and perhaps, but not necessarily, well-respected individual investor with deep financial pockets who buys enough shares in a company in order to have a platform to pressure management to make changes he feels are necessary. Case in point is activist investor, Ralph Whitworth, who has accumulated 1.3% of Home Depot stock and appears to have successfully pressured management into selling off its lower margin wholesale supply business. Only time will tell if situations like these ultimately enhance shareholder value. Still, it does indicate that CEOs are becoming more sensitive to outsiders, while they are feeling more pressure to perform in the best interest of shareholders. Nevertheless, corporations that make strategic moves to appease activist pressures don’t exactly make me feel confident in their leadership abilities. Any CEO who needs an outsider to figure out what he should do might not be worth a whole lot… Golden parachutes notwithstanding…

Another interesting case involves Applebee’s International Inc. and hedge fund, Breeden Partners, which owns a 5.3% stake in the restaurant chain. Breeden Partners deems Applebee’s performance “dreadful” compared to its peer group. That’s an interesting assessment, given that Applebee’s stock has dramatically outpaced Max & Erma’s, O’Charley’s, Cracker Barrel, and Ruby Tuesday over the last 5, 10, and 15 year time periods. What peer group he is referring to?

I am not endorsing Applebee’s in any way, and in fact I don’t follow it (perhaps I should). My point here is that just because an investor owns a lot of the stock does not mean he knows a lot about the performance of the shares, especially over the long term.

So what else can a CEO on the hot seat do to impress the investment community?... He can buy back stock! Which is exactly what 3M recently announced as its board authorized a $7 Billion repurchase program, its largest ever.

While financially this will improve earnings per share numbers, I’m wondering if it is also an indication that 3M, long noted for its innovative prowess, is having trouble finding new products and technologies in which to invest. The stock has under performed over the last couple of years so maybe I am on to something.

The CEO can also jump back in the driver’s seat… Which is what Michael Dell did at the company bearing his famous name. Mr. Dell returned to the CEO role after nearly two years of difficult times as the company struggled to leverage its direct sales model into other areas such as printers, networking, and storage. While Michael Dell is an icon in the industry, he faces a tough road ahead to return the stock to its glory days.

So what does this all mean for the foreseeable future?... CEOs on the hot seat, outsiders driving strategic decision-making, and a mountain of corporate cash waiting to be invested all make me feel we might see some strange things happen this year. It would not surprise me to see several huge mergers, acquisitions, or leveraged buyouts announced. Some will make great sense. Some will not.

And yes, some CEOs do need a wake up call… Not that I can relate to this personally, but a couple of hundred million in the old bank account might just take the motivational edge off some corporate leaders. That might be one reason why executive compensation remains a controversial topic and a popular target for shareholder activists to attack. In fact, as this edition of Willingdon Views goes to print, AFLAC (think duck commercial) became the first U.S. company to let shareholders vote on executive compensation pay packages. I imagine we will see more of this going forward. I hope to have more thoughts to share regarding CEOs on the hot seat going forward. Stay tuned.