Annex Bulletin 2006-44                              December 11, 2006

Excerpts from CONFIDENTIAL client edition

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INDUSTRY TRENDS

Updated 12/18/06, 10:30AM PDT, adds Market Update...

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

Hedging the Bets

Four Major IBM Institutional Holders Exit the Stock, But New Believers Pick Up the Slack and Then Some

HP Stock Nearly Doubles, Some Major Holders Exit, Taking Profits

Accenture: Value Marries Price, Shares Setting All-time Highs

EDS, the "Titanium Stock", Continues to Confound, Defy Common Sense, Reason

CSC's Roller-Coaster Ride

BearingPoint: Resilience in the Face of Adversity

Major ACS Owners Bail Out amid Options Scandal

Perot Systems Shares at New Multi-year Highs

Summary: Hedging the Bets

SCOTTSDALE, Dec 11 - For decades, this Wall Street institution has been a stalwart Big Blue supporter.  Through thick and thin; through feast and famine; through triumphs and foibles of IBM's able and feeble leaders, this Wall Street institution stuck it out with the company that the Watson's built.  Well, no longer.  Merrill Lynch is out.  No longer among the top 10 IBM institutional shareholders, not even among the top 25, Merrill has been watching the recent rise of the Big Blue shares from the sidelines.  And probably gritting its teeth... 

[CHARTS HERE]

For, IBM shares are up about 30% since their nadir on July 18.  And even the sometimes fickle Wall Street media are now singing praises to "The New IBM," like Barron's, for example, in a Dec 3, 2006 cover story.

But the IBM stock is still down 1% from two years ago.  As you can see from the above chart, the Big Blue shares have not really fully recovered fully from the Apr 15, 2005 shockwave that sent institutional shareholders scrambling like mice before a cat (see "Slammed and Dunked," Apr 2005).  

[snip]

HP Stock Nearly Doubles, Some Major Holders Exit, Taking Profits

By contrast to IBM, the HP has nearly doubled in the last two years (up 95% to just under $40 per share - see the chart). 

[CHARTS HERE]

This means that the HP stock has outperformed the Dow, of which it is a part, by nearly six-fold during the same time frame, despite a record overall market surge.  And most of this gain came since Mark Hurd took over as CEO in April 2005.  

[snip]

Accenture: Value Marries Price, Shares Setting All-time Highs

It does not happen often these days on Wall Street that value marries price.  Accenture is one such exception.  The company that is regarded even by most of its peers as the "best of breed" in the global IT services market, is also treated as an "MVP" (Most Valuable Player) by the stock market.

[snip]

EDS, the "Titanium Stock", Continues to Confound, Defy Common Sense, Reason

By contrast to Accenture, the EDS stock is the epitome of divergence between value and price.  As we have been saying for years, EDS shares have continued to confound common sense and reason.  For a while it seemed that the company could do no wrong.  The worse the news got, the better the stock did (see “EDS: The Titanium Stock,” Dec 2004 and "EDS: A $6 to $9 Stock?," Feb 2005).  That was because the company has the highest institutional shareholding percentage of any company we follow (93% - see EDS table).  And Wall Street certainly knows how to cover its tracks and protect its positions.

[snip]

Ex-EDS Sales Chief Named Top Dell Services Exec: Market Unimpressed

SCOTTSDALE, Dec 12 - Dell has tapped the former EDS sales chief to lead the computer maker's global services organization.  As senior vice president of global services, Steve Schuckenbrock will report to CEO Kevin Rollins and serve as a member of the Dell Global Executive Management Committee. He will begin work with Dell on Jan. 8.

[CHARTS HERE]

But the markets were unimpressed by the news.  EDS stock was actually up 0.4% this morning, while Dell's dropped 1.8%.  We think such a reaction was erroneous on both counts.

[snip]

 CSC's Roller-Coaster Ride

The CSC stock has been on a roller-coaster ride in the last two years.  It went down steeply in the first half of 2005, bottomed out by late summer, and rose to a five-year high of $60 in the spring of this year.  

[CHARTS HERE]

Then a series of disappointing announcements drove the CSC shares down into the $40s by late August (see "Up for Grabs," May 2006 and "Ebb Time Lowers Most Boats," Aug 2006).  The stock has since recovered some of its luster, but it is still down 4% compared to the level two years ago.

[snip]

BearingPoint: Resilience in the Face of Adversity

For most of the last two years, BearingPoint shares were treading water, trading in the $8 to $9 range.  The stock was as high as $9.6 and as low as $7.4 in the last 12 months, finishing last week down 5% from Dec 6, 2004.

[CHARTS HERE]

Operating without the published and audited financials for much of the last two years, investors have had to make their bets basically on their hunches and the reputation of Harry You, a former Wall Street executive, whom the company brought on board as CEO in March 2005 (see "Where You-turn Means Upturn," May 2006).  Under the circumstances, we think it is absolutely remarkable that the BearingPoint stock has shown such resilience in the face of adversity.  

[snip]

Major ACS Owners Bail Out amid Options Scandal

SCOTTSDALE, Dec 12 - By the time ACS closed its barn door on the options scandal on Nov 27, announcing that its CEO and CFO had resigned, many of its major institutional holders had already bailed out. 

[CHARTS HERE]

As of Sep 30, the sold-out positions outpaced the new positions acquired by the institutional shareholders by 24 million shares to 9 million shares.  Sellers outnumbered the buyers by 247 to 128 during the third quarter.  As a result, institutional shareholdings now hold only 64% of the total shares outstanding, versus 90% two years ago.  Correspondingly, the insiders' ownership rose from 8% in Dec 2004, to 13% now.

[snip]

Perot Systems Shares at New Multi-year Highs

Perot Systems shares are setting new multi-year highs.  At $16.10, they are up 3% from the price two years ago, which was also a multi-year high.  For the smallest company among the top 8 IT services firms that we have been analyzing, Perot's stock has been a model of stability (see Top 8 chart).

[CHARTS HERE]

Attitudes of the major institutional Perot Systems' shareholders reflect that, too.  There has not been much change among the top holders, as most institutions chose to hang on to the winner.  In the third quarter, for example, the buyers and the sellers were fairly balanced - 5.5 million shares bought versus 5.3 million shares sold.  Buyers also outnumbered the sellers by 77 to 70.  "Steady as she goes," seems to be the Perot Systems modus operandi.

[snip]

Summary

As may be fairly obvious by now from the preceding analyses, the HP stock was by far the best performer among the top 8 IT services firms whose institutional shareholdings we have analyzed.  It was followed by Accenture and EDS, in that order.

[CHARTS HERE]

The cellar was reserved for ACS and BearingPoint.  No surprise there, as each company has had its share of troubles in the last two years.  Ironically, the two are joined in the cellar by IBM, a company that has reported enviable fundamentals lately.  Which is another illustration of just how much the Big Blue shares are still undervalued.  And how unforgiving the marketplace has been to IBM for having missed its first quarter 2005 numbers by such a wide margin (see "Slammed and Dunked," Apr 2005 and "IBM Stock Grossly Undervalued," July 2006).

[snip]

Finally, hedging the bets as what Wall Street institutions do well.  Notwithstanding the differences in fundamentals of the top 8 IT firms covered in this report, the top 10 Wall Street investors in high tech own a little bit of most of them. 

[TABLES HERE]

And so on... (see Top 10 Summary).  You don't have to be a hedge fund to hedge your bets.  The biggest Wall Street players are doing it day in and day out.  It's only the suckers hope to win by making individual bets.  Good luck to them!

[snip]

"That's all she wrote," we're afraid, for those of you who are NOT Annex Research clients, who are now reading the complete Annex Newsflash, along with all charts which back up our story.

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Happy bargain hunting!

Bob Djurdjevic

Market Update: Up, Up and Away

IT Companies Lead the Market Surge; Accenture, IBM on Top; Record Dow: Low Man on Totem Pole

SCOTTSDALE, Dec 18 - Major IT companies are leading the latest market surge.  How do we know it?  Take a look at the charts...

Accenture and IBM, for example, which rose again this morning to new record highs, are exceeding the record highs that the Dow is also setting.  In fact, all three are higher than HP, the top IT stock in the last 18 months in terms of stock market performance.

For the year, however, HP is looking on top.  So Accenture and IBM are now only catching up to HP's earlier gains. Meanwhile, the record Dow, of which both IBM and HP are a part, is still the low man on the Wall Street totem pole.

A broader view of major IT stocks shows similar trends.  All but two (Intel and Dell) have outperformed the record Dow in the last 12 months. Clearly, the IT stocks are leading the stock market surge.  Funny you don't see much about that in the financial press... 

For additional Annex Research reports, check out... Annex Bulletin Index 2006 (including all prior years' indexes)

Or just click on and use "company or topic name" keywords.

Volume XXII, Annex Newsflash 2006-44
December 11, 2006

Bob Djurdjevic, Editor
(c) Copyright 2006 by Annex Research, Inc. All rights reserved.
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