Chuck Hill, research director of First Call Corp., which compiles analysts’ recommendations, says that four of the 22 IBM analysts in his database downgraded IBM after its announcement. This is what rural types call locking the barn door after the horse has been stolen. How many analysts had downgraded IBM this year before Wednesday’s announcement? One, who in May cut IBM to “buy” from “strong buy.” “We’ve said for a while that there are too many analysts getting a free ride in a market like this one, and they don’t bother to go out and kick the tires,” says Hill. “If more than one analyst [Kevin McCarthy of Donaldson, Lufkin & Jenrette, who cut his earnings estimate on June 7 but left his “hold” recommendation intact] had done their homework,” Hill adds, “the stock wouldn’t have gotten as high as it was, and it wouldn’t have fallen as much as it did.”
The fact that one of the most widely followed stocks on the planet can move so greatly in a single day without a fundamental change having taken place shows how volatile the stock market has gotten. David Braverman, a senior investment officer at Standard & Poor’s, points out that IBM’s stock has had two big price rises this year as well as Thursday’s big meltdown. On April 22, IBM rose 13 percent because earnings were higher than expected, and on May 13, it rose 9 percent after Gerstner told analysts that a quarter of IBM’s sales came from Internet-related businesses. “IBM is no less volatile than any tech stock these days,” Braverman says.
One of the stranger aspects of IBM’s Thursday drop is that you may have seen it calculated two different ways. Here’s why. Most newspaper stock tables and financial Web site numbers showed IBM dropping 15 percent Thursday, to $91 from $107. But if you calculate the way Dow Jones and S&P do–and the way we’re doing here–the drop was 19.3 percent, to $91 from $112.75. The reason? Dow Jones and S&P use the New York Stock Exchange’s 4 p.m. (New York City time) closing figures, but stock tables and Web sites generally include NYSE after-hours trading, which runs until 5:15. IBM made its Wednesday announcement during after-hours trading, and the stock dropped to $107 from its $112.75 4 p.m. closing price.
The $21.75 decline whacked $39 billion from IBM’s stock-market value, and reduced the value of chairman Gerstner’s stock and options by more than $175 million, poor guy. IBM’s drop cost the 30-stock Dow Jones industrial average 110.19 points, which is more than the Dow’s Thursday drop of 94.67 points (0.9 percent). Thus, all by itself, IBM turned a positive day for the Dow into a reasonably negative one. In addition, IBM seriously distorted the S&P 500, which fell 5.82 points, or 0.45 percent. S&P says IBM accounted for more than 80 percent–4.76 points–of the loss.
The point of this exercise? To show you not to take Wall Street “research” too seriously. And to remember to laugh the next time someone tells you that the stock market is a rational place and that big-money investors know what they’re doing.
