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Analysis of Institutional Ownership of Top 8 IT Services Vendors’ Shares

Following the Money

Top 25 Institutions Account for One-Third of Top 8 IT Firms’ Market Cap; Perot Systems, BearingPoint, ACS, Accenture - Most Popular in 4Q03

PHOENIX, May 5 – They say one should follow the money to get to the heart of most mysteries.  We applied that truism to the changes in institutional holdings of the Top 8 IT services firms.  And we found that institutions loaded up on six of the Top 8 stocks during the fourth quarter 2003.  They increased their average holdings in Perot Systems (+735%), BearingPoint (+370%), ACS (+213%), Accenture (+30%), EDS (+10%) and HP (+5%) – in order of relative popularity.  Only IBM’s (-1%) and CSC’s  (-3%) biggest shareholders reduced their average holdings during the same period. 

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And how have these stocks done so far in 2004?  Well, their market cap dropped by an average of 9% since Dec. 31.  BearingPoint and Perot Systems did the best by staying basically the same, and dropping by 1% respectively. 

Interestingly, IBM and CSC, the two companies whose biggest owners seemed to spurn them in the fourth quarter, were the next best performers in 2004 to-date.  They recorded price declines of 5% and 8% respectively. 

The other four IT services competitors’ stocks dropped in double digits, with EDS’s falling the steepest (down 26%).  Yet EDS was one of the Top 8 competitors to have received a big vote of confidence from its owners in the fourth quarter (see “On a Wink and a Prayer,” Apr 29).

So much for the big institutional investors knowing which end is up.  As we said in an earlier Annex Newsflash on EDS…

“So you think big institutional investors know which end is up in companies into which they pour billions of their own and their clients' money? Well, think again.  Seventeen of the Top 25 Electronic Data Systems (EDS) institutional shareholders actually added hundreds of millions of dollars to their positions just before the stock took a dive in 2004.”

(from Annex Newsflash 2004-09, 4/29/04)

You also saw from the May 1 Annex Newsflash on HP and CSC (see “Keeping Faith, Losing Faith,” May 1) that some institutional investors zig when others zag:

“Hewlett Packard management got a resounding vote of confidence from their largest shareholders in the fourth quarter of 2003 despite the stock's meager performance (down 1see the charts and "Still No Cigar", Feb 2004).

Computer Sciences Corp.'s (CSC) biggest owners, by contrast, voted with their feet. Most reduced their holdings in the last three months of last year, perhaps in anticipation of the slide in the CSC stock price in 2004 to-date.

Whatever their motivation, eight of the Top 10 HP holders added to their HP positions in the last three months of 2003, some quite aggressively.

Whatever their motivation, 17 of the Top 25 CSC holders sold off their holdings in the last three months of 2003, some quite aggressively.”

(from Annex Newsflash 2004-10, 5/01/04)

Thanks to their aggressive buying in the fourth quarter (average number of shares up 30%), the Top 25 institutional investors’ Top 8 IT services companies’ aggregate market cap surged by 26% (from $75 billion to $86 billion), despite the price declines of seven of eight individual stocks during the first fourth months of 2004.  

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Since BearingPoint performed the best among the Top 8 firms’ stocks in 2004 to-date, it is not surprising that the Top 25 institutions’ market cap reflected it.  BE was up 76% as of April 30.

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That the Accenture stock was also very popular among the largest institutional investors should come as no surprise, either, given its stellar business results in the latest reported quarter (see “Burning the Track,” Mar 2004).  As a result, Accenture’s aggregate market cap held by the Top 25 surged by 40%, despite the 10% decline in its stock price in 2004 to-date.

But what is downright stunning is that the second most popular stock among the Top 8 IT services firms is actually the biggest market share loser on the global playing field – EDS!? (see “Octathlon 2004,” Apr 2004).  Its aggregate market cap held by the Top 25 surged by 44%, the second best!? 

Go figure…

The rest of the Top 8 market cap figures lined up more or less in concert with common sense.  ACS and HP were up 31% and 29% respectively, Perot Systems and CSC by 16% and 14% respectively.

Confirming another common sense hypothesis, smaller cap stocks, such as Perot Systems, ACS or BE, for example, are favored more by smaller institutions than by big ones.  Thus their share of the Top 25 investors is also smaller in comparison to IBM’s, EDS’s or HP’s of this world.

A mild surprise may be the fact that IBM was virtually shunned by the biggest institutional shareholders – its erstwhile biggest friends and supporters.  Big Blue’s market cap increased by only 3% even though its stock price dropped very moderately (down 5%).  That’s because the largest institutions shed about 1.5% of the IBM shares from their portfolios during the fourth quarter.

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Accenture’s Biggest Holders Load Up on Stock

Accenture was another company that received a big boost from some of its largest holders.  But not all… Six of its Top 10 institutional owners reduced their holdings in the fourth quarter.  But others more than made up for it (see Table 1 and Table 2).  The 10 biggest Accenture fans added gobs of additional shares to their portfolios, lifting the average number of shares in their portfolios by about 30%.

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As a result, the market cap of the Top 25 holdings increased by 40% since 9/30/03, from $2.3 billion to $3.2 billion, lifting the Top 25 share of the company’s value in the last seven months from 10% to 14%.

Nevertheless, Accenture continues to hold the lowest share (31%) of institutional owners among the Top 8 IT services firms.  Perot Systems (41%) and IBM (56%) are the next higher ones.  All the rest have 65% or higher institutional ownership (see the chart below).

As we suggested in our earlier update on institutional investing (see “Hedging the Bets,” Mar 2004), the lowest institutional ownership makes Accenture and Perot Systems less vulnerable to sudden mood swings among the relatively few investors.  The price chart below offers a proof of that theory.

Happy bargain hunting!

Bob Djurdjevic

[1]  The “Top 8” IT services companies would, of course, include Cap Gemini.  But this company’s shares are traded on the Paris Bourse, and the data about institutional shareholdings is not readily available.

For additional Annex Research reports, check out... 

2004 Global/Industry: Following the Money (Mar 2004); Hedging the Bets (Mar 2004);  HP, CSC: Keeping Faith, Losing Faith (Apr 2004);  EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); Accenture: Burning the Track (Mar 2004);  IGS: "Crown Jewel" Restored? (Mar 2004); A Passage FROM India (Mar 2004); IBM: Greed De-clawed (Feb 2004); China Now Bigger Than U.S.! (Jan 26);  IT Industry: Whither Goeth It? (Jan 20); Five Most and Least Likely Forecasts for 2004 (Jan 2004)

2004 IT: Cap Gemini: Another, Smaller Loss (Feb 2004); CSC: Good Quarter Gets Boos (Feb 2004); EDS: " Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); IT Industry: Whither Goeth It? (Jan 2004); Cronyism Is Alive and Well at EDS" (Jan 2004)

2003 Global: "A Passage to India" (July 22),  Exodus from Equities (May 27), Money CAN Buy Longer Life (May 6), Global Investments Plummet (Jan 23)

A selection from prior years (Global): Greed Bites Back (Nov 29, 2002)Salomon/Gutfreund: Wall Street Casino (June 21, 2002)"From a Nation of Producers, to a Nation of Gamblers " (June 23, 1999), "When Will Wall Street's Bubble Burst?" (1998), "Wall St.'s Conquest of America" (1998),   THE GREAT AMERICAN HOOVER (1997)

Or just click on and use "financial engineering" or similar  keywords.

Volume XX, Annex Bulletin 2004-13
May 5, 2004

Bob Djurdjevic, Editor
(c) Copyright 2004 by Annex Research, Inc. All rights reserved.
e-mail: annex@djurdjevic.com

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