Annex Bulletin 2005-11                      March 28, 2005



Updated 4/02/05, 11:10AM MST (adds "You Gain Chart")

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

EDS Booster Club Fees Rise

Four Major Supporters Prop Up the Stock, But Several Skeptics Sell Off

PHOENIX, Mar 28 – “It’s always good to have friends in high places, the kind that pull you up when you’re falling through thin ice,” we wrote in our final Annex Bulletin of 2004 (see “EDS: The Titanium Stock,” Dec 2004).  “Well, Michael Jordan, EDS’ CEO, evidently has lots of them on Wall Street.  Together they’ve build EDS into a ‘titanium stock’ while skating on thin ice.”

Well, now that the fourth quarter institutional shareholdings have been published, we can tell you who the “platinum members” of the “EDS Booster Club” were that extended their helping hand to a listing ship’s captain.

They were Merrill Lynch, Alliance Capital, Hotchkis & Wiley and Equinox Capital – in order of their respective membership contribution increases.  Between the four, they’ve added about 20 million EDS shares to their positions in the fourth quarter of 2004.  And now that the “titanium stock” has developed some cracks as predicted (down 13% so far this year), their “EDS Booster Club” dues just went up by a few hundred million dollars.  

Were these among the traders that propped up the EDS stock the morning after each third quarter announcement delay? (see “Unusual Trading Patterns…”, Nov 2004).  If so, why and how?  Those are the kinds of questions the SEC and Eliot Spitzer ought to be asking.

But not all of the EDS top 15 institutional shareholders were crazy about their stock pick.  While the majority of them (nine) didn’t make any major moves in the fourth quarter, some have done a complete turn about face.  Brandes Investments, for example, dumped 10 million shares, reversing its EDS buying spree during the first months of the year.  And now that the EDS stock is down, Brandes can be branded as a winner.

Capital Research, the third-largest EDS shareholder as of our last report, also continued to show a lack of faith in the company’s turnaround success.  It sold off over 13 mil lion shares in the fourth quarter, the biggest reduction of any EDS institutional shareholder.  This dropped Capital Research to the number four spot among the top EDS holders.  Which means they still have a lot to lose – some $859 million as of Dec 31, 2004.

As previously reported, however, some major Wall Street players didn’t wait that long.  Morgan Stanley, Fidelity and Oppenheimer, for example, dumped most or all of their EDS shares in the first nine months of last year.  They may have exited the EDS Booster Club early, but at least they no longer have to sorry about owning a $9-stock, thinking it’s worth $20 or more (see “EDS: A $6 to $9-Stock?,” Feb 2005 and “Rumor Lifts EDS's, Fujitsu's Shares,” Mar 2005).

IBM Stock Down, Profit Up

The way Wall Street has been treating IBM versus EDS lately is a study in contrasts.  Today’s EDS is sounding like IBM of the old: It’s promising a better tomorrow instead of delivering a better today.  No wonder the EDS stock is down.  The only wonder is that it is not down more.

Meanwhile, IBM’s recovery is well under way.  The company is setting new revenue and profit records.  So you’d think its stock would be up?  Well, think again.  IBM shares are down about 10% since the end of 2004.

IBM’s lackluster stock market performance may have actually encouraged its top institutional holders to load up on some more of Big Blue shares.  Led by Fidelity, Wellington, and JP Morgan, six of the top 10, and nine of the top 15 IBM shareholders added to their positions in the fourth quarter.  Guess they are figuring on bluer skies ahead, even if the rest of the market can’t seem to get it (see “IBM 5-yr Forecast: Quality over Quantity,” Mar 2005).

But the two biggest IBM holders, State Street and Barclays, both reduced their holdings by about 24 million shares in the fourth quarter.  That’s more than double the number of shares added to the three biggest IBM bulls’ portfolios.

HP: No Boost from Carly’s Ouster

Any benefit that the HP shareholders got from Carly Fiorina’s ouster was short-lived at best (see “Carly's Fickle Fans,” Feb 2005).  After a brief upward spurt in mid-February, the HP stock slid back below the level it was at on Feb 8 ($20.14).  Neither the billions of dollars HP is spending on stock buybacks, nor Merrill Lynch’s cheerleading could stop the decline.  For the year, the stock is down 9%.

But no one can ever accuse the HP institutional shareholders of not taking positions regarding the company’s future.  Only two of 15 biggest shareholders sat on their hands.  The rest of them - both sellers and buyers - placed their bets aggressively in the fourth quarter, as tens of millions of shares changed hands.

By the time all was said and done in 2004, the major sellers outnumbered the major buyers among the top 15 holders 7-to-6.  The biggest HP shareholder, Capital Research, for example, added 18.4 million shares to its already formidable portfolio (157 million shares), surpassing Alliance Capital (134 million shares), a net seller of 5.6 million shares in the fourth quarter, on its way to number one spot.

Merrill Lynch, HP’s favorite broker in the stock buyback transactions, added 2.8 million shares to its total (49 million).  But buying its aggressiveness paled in comparison to Private Capital, JP Morgan and Tiaa Cref which added 8.7 million, 6.8 million and 5.6 million shares to their respective holdings during the same period.

CSC: Vote of Confidence Followed by Stock Decline

Barclays, Goldman Sachs and Calamos shouted “vamonos” with their wallets as they led a cavalcade of seven of top 15 CSC institutional shareholders that added millions of shares to their positions in the fourth quarter of 2004.  Alas, it was all for naught.  

Their vote of confidence was “rewarded” by a 19% decline in CSC stock price in 2005 – the steepest drop of any of the Top 8 U.S. IT services companies whose institutional ownership we have analyzed.

Among the big CSC institutional holders that reduced their stakes were Fidelity, Michigan Treasury, Equinox and JP Morgan.  The fact that CSC is downsizing on purpose must be taken by some for a weakness (see “CSC” Gearing Down on Purpose,” Feb 2005).

Nevertheless, the long-term believers outnumbered the doubters.  As a result, the institutional share of CSC ownership went up from 80% to 86% in the fourth quarter.  If only they could convince the remaining skeptics that CSC has not peaked…

Accenture Stock Also Down, But BearingPoint’s Up

After a big stock surge in 2003, the Accenture stock has been basically treading water in the last 12-15 months, trading in the $23 to $28-range, with its six-month moving average around $25.  Accenture set an all-time high of $28.10 in early July, in advance of its stellar fiscal year-end results.  But in 2005, the stock is down 10% so far.  

Welcome to the “club!”  Only one of the top 8 U.S. IT services companies has seen its shares rise so far this year.  It is the smallest one in terms of market cap – BearingPoint – whose stock is up 6% for the year. 

BearingPoint's $3.4 Billion-Man

Ironically, most of its gain came last week, after the company announced that the former Accenture and Oracle CFO, Harry You, would take over as its new CEO.  You, who also hails from Wall Street (former Morgan Stanley), is highly respected by the investment community that’s evidently banking that he would lead BearingPoint to a better future.

A couple of weeks later, BearingPoint has kept its You gain, while Oracle has retained its You loss.  Which makes the new BearingPoint CEO about a $3.4 billion-man, by our calculations.

But don’t look for any logic in the way investors behave.  The same could have been said of Accenture’s institutional shareholders.  Nine of top 15 loaded up on the company’s stock in the fourth quarter only to see a drop in the first quarter of 2005.  But since the company has the lowest institutional ownership share of any company we follow (38%, up from 37% in 2004), Wall Street’s direct trading influence is less pronounced.

The biggest BearingPoint boosters in the fourth quarter were Hotchkis & Wiley, Goldman Sachs and Pzena Investments, in that order, each adding about five million shares or more to their BE portfolios.  The loudest among the BE detractors was also the company’s largest shareholder – Fidelity – which reduced its BE stake in the fourth quarter by over one million shares.


The first quarter decline in the values of seven out of eight the Top 8 U.S. IT services stocks comes on the heels of a decidedly bullish attitude of their major shareholders during the fourth quarter of 2004.  Except for EDS, whose owners decided to reduce their holdings, all other institutions either held on to their IT services stock, or added to their positions.  CSC and BearingPoint experienced the biggest increases in institutional ownership shares.

Time will tell if this is just a seasonal adjustment, or an indication that the popularity of the IT sector on the stock market may have peaked.

Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2005 IT:  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)

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Volume XXI, Annex Bulletin 2005-11
March 28, 2005

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

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