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Forward to friendTech Trouble?
By Steven Lord
The problem with record stock markets is that they leave very little room for error. Or, in the case of many tech stocks lately, even little room for the status quo. Like a petulant child upset because he or she didn't get a second ice cream, investors tend to become very spoiled, very quickly when stocks are in nosebleed territory. Inevitably, prices reflect "good" when investors want to see "great", and they begin expecting companies to routinely surpass their expectations. This, of course, is a spiral that eventually ends up with the stock delivering great results and getting hammered for it.
Coming right on the heels of Apple's "disappointment", IBM reported earnings last night that will certainly be the talk of the morning today. IBM earned $2.31 per share on sales of $26.3 billion, thrashing estimates of $2.19 per share. It was IBM's best quarter of the year. For all of 2006, the company grew EPS by 20%, to $6.11 per share. Sounds good, right?
Wrong. Investors sent IBM down 5% in after-hours trading, apparently because six cents of IBM's EPS last quarter were from changes in tax rates and fluctuations in the dollar aided results in some divisions. Never mind that IBM had its best quarter for contract signings in recent memory, closing $17.8 billion in new contracts - or half of annual sales - or that the company's software division (its most profitable) is growing at the best rate in five years.
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This is what happens when stock markets linger in record territory without a pullback. Apple had the best quarter of its existence in Q406, yet legions of iPod users and Mac converts had already priced it. IBM delivers a report that would have been lauded a year ago, and gets spanked - again, because the stock is up over 20% since July, not because the company isn't delivering.
It will be interesting to see how far IBM falls during trading today, and what effect it has on the tech sector. Apple's record earnings release managed to torpedo the entire technology sector on Thursday, sending the NASDAQ down 36 points. Imagine what would have happened if Apple or IBM has missed estimates by the dreaded penny or two?
A few years ago, we all saw what happens to stocks that get priced to perfection. When you see major bellweather companies get sold off hard in spite of posting strong growth that matches or even slightly exceeds expectations, it is a signal that the "best of times" is already reflected in stock prices. It is yet another signal that the market is due for a breather.
Sincerely,
Steven Lord, Editor, GRESSOR
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