Annex Newsflash 2005-31                            October 12, 2005



Updated 10/16/05, 12:10 PM PDT (adds Wall Street Summary)

Analysis of Institutional Shareholdings of Top 8 U.S. IT Services Companies in Second Quarter

Top Wall Street Firms Bump Up Investments

Lots of New Blood Emerges from IBM's April Blood Bath; As Biggest Owners Dump Their Shares, Others Snap Them Up

Changing of the Guard at IBM

Merrill Deserts EDS, Most Big Holders Boost It

HP Stock Lifted by Broad Public Support?

Accenture Stock Price Doesn't Match Its Excellent Results

BearingPoint Rises from April Ashes

CSC: Not Much Movement

SUMMARY: Top Wall Street Firms Bump Up IT Investments

PHOENIX, Oct 12 "One man's trash is another man's treasure," goes an old saw (actually lifted from Matthew 13:31-33, 44-52).  When IBM stock crashed back in April, following the release of its disappointing first quarter results (see "IBM: Slammed and Dunked," Apr 2005), many of its biggest shareholders panicked.  Barclays, State Street, Fidelity, Wellington, JP Morgan Chase... each sold off several million IBM shares in the second quarter.

But out of the April bloodbath emerged lots of new blood among Big Blue's institutional shareholders.  Many other investors that had not been previously known as IBM aficionados jumped at the opportunity of buying Big Blue shares at heavily discounted prices.  T Rowe Price, Banc of America, Neuberger Berman, Turkman Capital, Merrill Lynch... were the bravest and the boldest among such investors.  Each bought millions of Big Blue shares amid a perceived industry slump.

Thus it can be said that there has been a changing of the guard among the top IBM institutional shareholders.  The biggest are still the biggest, mind you.  They did not sell all of their shares in the second quarter.  But they are certainly bruised and a little battered.  And the smiles are on the faces of newcomers, as the whole market gets poised for the usual big fourth quarter and the year-end surge.

The first such upswing in IBM shares is already discernible this week after several Wall Street analysts upgraded their forecasts ahead of next week's (Oct 17) IBM's third quarter earnings release (see the chart).  Some media reports, emboldened by Accenture's stellar earnings results last week, also helped push IBM and other IT shares higher (see "Accenture earnings bode well for IBM," Reuters, Oct 7, 2005).

But the fact that IBM will get the full benefit of its new "z9" mainframe's volume shipments in the fourth quarter ought to be the most encouraging factor of all (see "IBM: Polaris Eclipses T-Rex," July 2005, and "IBM starts shipping latest mainframe," Reuters, Sep 16, 2005).

Annex Clients: Click here for detailed institutional holdings of IBM.

Merrill Deserts EDS, Most Big Holders Boost It

PHOENIX, Oct 12 - It was a passionate affair, albeit short-lived.  After being one of EDS' biggest boosters in the first quarter, Merrill Lynch unceremoniously dumped its erstwhile flame (see "Merrill's New Bull [EDS]" May 2005).  The Wall Street behemoth sold off 6.2 million EDS shares in the second quarter.  This turned the biggest EDS bull into the loudest bear among the top 25 institutional owners of the Dallas-based IT services firm.

The key question, however, is when exactly did Merrill sell these EDS shares?  If it happened on or after May 26, the SEC or Mark Spitzer could have a field day.  Why May 26?  Because that's when Merrill upgraded the EDS stock, giving it a temporary boost.  If, however, Merrill had sold off most of its EDS shares well before that date, the company does deserve kudos for proving the independence of its research.  Analysts zigged while the Merrill traders zagged.

While we leave the Merrill-EDS break-up for the authorities to sort out, most of EDS' other institutional owners stayed loyal to the beleaguered company.  Several of them added huge (multi-million share) amounts of stock in the second quarter their holdings.  Alliance Capital, for example, bought 15.5 million shares.  Hotchkis & Wiley put another 10.9 million shares into its already lofty EDS portfolio.  Northern Trust, secured 7 million additional shares in the second period.  And so on...

But there were a few other detractors, too, besides Merrill.  Capital Research, for example, sold off 5.7 million shares.  State Street dumped just over a million.  And so on...

Overall, however, Wall Street continues to stand behind EDS through all of its trials and tribulations.  With a 90% institutional ownership, the highest among the top eight IT companies we have analyzed, the company's Wall Street shareholders have good reasons for doing it.  Doing otherwise could hurt their interests.  If EDS did stand a chance of a real long-term turnaround, such a loyalty would be admirable and rare among institutional owners.

Annex Clients: Click here for detailed institutional holdings of EDS.

HP Stock Lifted by Broad Public Support?

PHOENIX, Oct 13 - Any time the market moves up or down in big swings as it did last spring when Wall Street trashed the high tech stocks, it creates buying as well as selling opportunities.  That point was particularly poignant in the case of HP, the only stock among the Top 8 that actually appreciated (up 24%) this year to-date.  As a majority of large HP holders headed for the hills, many others rushed in to buy the stock at, what they perceived, discount prices.

Based on the 24% price hike alone, common sense and logic would suggest that there were more buyers than sellers among the top institutional holders of HP stock.  Think again.  Common sense and logic don't always work on Wall Street.  Net sellers outnumbered net buyers 9-to-6 among the top 15 HP institutional owners.

Bank of America and JP Morgan Chase, for example, disappeared completely from the top 25 list.  Barclays, State Street and Alliance Capital, among others, also reduced their holdings by whopping amounts, selling off millions of HP shares.  But State Farm, Wellington, as well as smaller, boutique institutional investors, such as Harris and Barrow Hanley Mewhinney & Strauss, more than picked up the slack with their "mega-acquisitions."

As a result, there is now some fresh new blood among the top HP institutional shareholders, as there is a broader support for the stock among the investing public.  The institutions own about 70% of HP, slightly less than the 73% average for the Top 8 companies we've analyzed.  Which means that the public has a better than average chance of voting its support or displeasure - with its wallets or with its feet.  And what the public has seem in the last six months since Mark Hurd took over as CEO has been evidently to its liking.  Ergo the 24% stock rise.

Annex Clients: Click here for detailed institutional holdings of HP.

Accenture Stock Price Doesn't Match Its Excellent Results

PHOENIX, Oct 13 - If business performance were the sole criterion driving the stock prices of public companies, Accenture should be setting new all-time records, just as its business performance did in early October, when the company released its final fiscal year 2005 results (see "Accenture: A Whopper Quarter," Oct 2005).  Alas, Accenture's shares are down about 7% year-to-date despite its excellent business results.

One reason for it may be its fickle institutional shareholders.  Although Accenture has the lowest share of institutional holdings (39%) of all top 8 companies we have analyzed, the doubters among them were evidently still sufficiently prominent to have impacted negatively the stock price.

Meanwhile, the Accenture boosters among the top 20 institutional shareholders outnumbered the doubters by a 3-to-2 margin.  Led by Okumus, Deutsche Investment Management, Citadel and Vanguard Group, the buyers of the Accenture stock acquired millions of shares in the second quarter when its price dipped to the low $20s (see the chart).  After a sustained rise ever since late April, they are now sitting pretty ahead of the usual year-end surge of most IT stocks.

Accenture's largest institutional shareholder, Mfs Investment Management, which owned over 34 million shares as of June 30, was also a net buyer in the second quarter.  The firm added 1.34 million shares to its Accenture portfolio.  But the second largest holder, Wellington, was among the big sellers, having dumped 5.6 million shares in the second period.  Wellington was joined by William Blair & Co, JP Morgan Chase and Eaton Vance... some of other big sellers.

Annex Clients: Click here for detailed Accenture holdings of major institutions

BearingPoint Rises from April Ashes

PHOENIX, Oct 14 - When Harry You, the former Accenture and Oracle CFO, joined BearingPoint as CEO in late March, the company's stock rose $3.4 billion in response (see "BearingPoint's $3.4 Billion-Man", Mar 2005).  But it has not been all roses for You since that time.  On the contrary.  A few weeks later, BearingPoint's disclosure of an SEC investigation of its improper accounting in prior years led to a stupendous fall in the company's market cap (see the chart).

Undeterred, You went to work.  Brick by brick, he built investor confidence back up (see "BearingPoint Gets New Cheerleaders," May 2005).  By early August, the BearingPoint stock was back above $8 per share, where it had been prior to the SEC investigation disclosure.  It has been coasting ever since, before dropping earlier this week following the Oct 11 analyst conference in which the company said it would delay the release of its restated 2004 financial results.  

But BearingPoint provided guidance for fiscal year 2006 of $2.70 billion to $2.85 billion in net revenue, and $180 million to $250 million in operating income. The company also projected net cash provided by operating activities in 2006 of $280 million to $350 million, and free cash flow of $230 million to $300 million for 2006.  

"We continue to make progress across our business segments, and expect to return to profitability in 2006," said You, the CEO. "We will continue to focus on building strong client relationships, investing in our key capabilities and expanding our business sensibly, strategically and profitably."

The news lifted the stock back up late in the day on Oct 11, and again the following morning.

A whole slew of new major BearingPoint shareholders that jumped on the You bandwagon in the second quarter must have been wringing their hands in glee.  Among the new BearingPoint/You aficionados were such Wall Street icons as Goldman Sachs, UBS and Wellington.  But many smaller companies also placed big bets on BearingPoint's turnaround (by buying in millions of its shares).  Glenview, Greenlight, Columbia, Legg Mason, Thornburg... were the biggest and the bravest among them.

In fact, 13 of 15 top BearingPoint shareholders added aggressively to their positions as the stock slumped in the second quarter.  The company's largest shareholder, however, Fidelity, and the third largest, Pzena Investments, were the only two detractors.  They sold off 5.77 million and 6.97 million shares respectively in the second quarter.

Annex Clients: Click on the company's name to view or institutional holdings of BearingPoint

CSC: Not Much Movement Among Top 15

PHOENIX, Oct 16 - After having weathered a deflation of the CSC stock in the first quarter, the company's top 15 institutional shareholders pretty much sat on their hands in the second period.  But some new CSC boosters placed big bets in its favor during the April-May IT stock doldrums.  Goldman Sachs, Seminole, Pzena and New Jersey State led the way and joined the top 15 in the second quarter.

Overall, net buyers outnumbered the net sellers 10 to 5, though neither group made any big moves in the second quarter (except for the four new institutions).  "Hold and wait" was evidently the preferred strategy of majority of CSC shareholders.  No. 20 Merrill Lynch and No. 21 Harris were the only detractors that reduced their CSC holdings by 25% or more (Annex clients can see the CSC table for details).

The CSC stock price matched the mostly flat trading pattern of its major institutional holders in the last six months.  It see-sawed in a narrow price range, edging slightly upward, though October has not been kind to it.

Annex Clients: Click on each company's name to view major institutional holdings of CSC, ACS and Perot

Summary: Top Wall Street Firms Bump Up IT Investments in Second Quarter

PHOENIX, Oct 16 - The biggest holders of IT stocks used the temporary second quarter drop in the value of the leading companies' shares as a buying opportunity.  The Top 10 holders of the Top 8 IT services firms' stock bumped up their IT investments to over $58.5 billion, up 7% over the first quarter's level.

IBM and HP continue to be the most popular stocks in the top 10 Wall Street players' portfolios, as you can see from the above chart.

HP was the only IT stock among the Top 8 whose market cap is actually up this year-to-date (up 24%).  ACS, CSC and IBM lead the declining column with 20% plus losses so far in 2005.  

So you'd think that HP would have gained the largest and the most sophisticated investors' "mind share" on Big Blue?  Think again.  Both companies were tied in that respect, increasing 6% in the second quarter.  It was BearingPoint, EDS and Accenture that earned the most "mind share" points with the largest investment firms.  They rose 80%, 41% and 37% respectively since the first quarter.  ACS and CSC, on the other hand, fell out of favor with the biggest Wall Street players, declining by 29% and 6% respectively.

The second quarter did not bring about much change in terms of insiders' shareholdings.  The insiders continue to be the most influential and Perot Systems and BearingPoint, and the least important at HP and CSC.

Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2005 IT: Top Wall St Firms Bump Up Investments  (Oct 2005); Accenture: A Whopper Quarter  (Oct 2005);   Global Investments: New "Drang Nach Osten" (Sep 2005);  HP: Sweet Turnaround (Aug 2005);  Dell Spooks Street (Aug 2005);  EDS Ups Its Forecast (Aug 2005);  Capgemini Beats Forecast (July 2005);  Fujitsu: Losses Reversed; Forecast Upgraded (July 2005);  IBM: Polaris Eclipses T-Rex (July 2005);   IBM Bounces Back (July 2005); Accenture: Smashing Records (July 2005); Merrill's New Bull (EDS) (May 2005);  IBM Trumps Trump (May 2005);  Tweaking Big Blue (May 2005); Hurd's First RBI (May 2005); Dell Rings the Bell (May 2005); Stock Buybacks: The Phantom Is Back (May 2005); EDS Misfiring on All Cylinders (May 2005);  HP Surges, Dell Slumps; Lenovo Completes IBM Deal (May 2005);  Fujitsu Revenues Flat, Lower Net (Apr 2005); Capgemini Jettisons Healthcare in N.A. (Apr 2005); HP: From India to Poland (Apr 2005); IBM: Slammed and Dunked (Apr 2005); Hurd Advice: Up Mount Market Cap (Apr 2005); Accenture: Roaring Ahead (Apr 2005);  Fujitsu Unveils New Servers (Mar 2005);  EDS Executive Suite; HP's New CEO (Mar 2005);  An iSeries Revival (Mar 2005); EDS Booster Club Fees Rise (Mar 2005);  An Upside-Down View (Mar 2005);   The Worst of Both Worlds (Mar 2005);  Octathlon 2005: Accenture Wins (Mar 2005);  IBM Global Services: Smaller, Shorter - Better? (Mar 2005);  IBM 5-yr Forecast: Quality over Quantity (Mar 2005); Rumor Lifts EDS', Fujitsu's Shares (Mar 2005); Capgemini: Turning the Corner (Feb 2005);  IBM Servers to Grow Again (Feb 2005);  Carly's Fickle Fans (Feb 2005);  CSC: Gearing Down on Purpose (Feb 2005);  EDS: Grossly Overpriced Stock (Feb 2005);  IBM Historical Update: 2004 Shot in the Arm (Feb 2005); New HeadTurners Series #1 (Feb 2005); IBM: A Crescendo Finale! (Jan 2005); Accenture: Strong Finish, Better Start (Jan 2005); Annex Coverage 2004: IT Services Dominate (Jan 2005)

2004 IT: EDS: The Titanium Stock (and other Wall Street tales) (Dec 2004); IBM PC: Good Riddance (Dec 2004); Fujitsu: Recovery Continues (Nov 2004);  IBM Server Renaissance (Nov 2004);  HP Hits Home Run (Nov 2004); Capgemini: Revenue, Stock Soars (Nov 2004); EDS: Jordan's Swan Song? (Nov 2004);  To Russia with Love and $ (Oct 2004); IBM: Slow Quarter No Longer (Oct 2004); Accenture: Revenues, Profits Up, Stock Down (Oct 2004); Capgemini: A Takeover Target? (Oct 2004); Sellout of America (Oct 2004); Spy Wars (Sep 2004); Outsourcing Boomerang (Sep 2004); EDS to Cut Up to 20,000 More Jobs (Sep 2004); Capgemini Stock Plummets on Unexpected Loss (Sep 2004); HP Savaged by Wall Street (Aug 2004); Moody's Lowers the Boon on EDS (July 2004); HP: Delivering Value Horizontally (June 2004); Accenture: Revving Up a Notch (June 2004); Beware Your CFO! (May 2004)IBM: Changing of the Guard (May 2004); Capgemini: Texas-size Home Run (May 2004); Following the Money (May 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); HP: Still No Cigar (Feb 2004); 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)

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

Volume XXI, Annex Newsflash 2005-31
October 12, 2005

Bob Djurdjevic, Editor
(c) Copyright 2005 by Annex Research, Inc. All rights reserved.

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