The Five Dumbest Things on Wall Street This Week

Red Hat's Red Alert Lab dips hat to real-time reaction

2. Red Hat Wonder

Some companies aren't distracted by the vicissitudes of the market. They keep their eye on the operational big picture, not the tiny ups and downs of their stock price. They take the long view.

Red Hat (RHAT Quote), we learned this week, is not one of those companies.

It all started after the market's close Monday evening, when the Linux provider announced that Chief Financial Officer Kevin Thompson was resigning to pursue those near-mythic "other interests" that departing executives so often pursue.

Skittish investors, however, interpreted Thompson's resignation not so much as a reflection of the CFO's personal growth, but as a sign that something was stinky at Red Hat. Red Hat's stock tanked in after-hours trading Monday, dropping 12%.

So what did the company do? With its fiscal first-quarter earnings already scheduled to be released Thursday, did Red Hat keep a stiff upper lip? Did executives say to themselves, "We'll teach those doubters a lesson. Once our numbers come out three days from know, they'll learn never to doubt the soundness of our business operations. Good things come to those who are patient?"

Of course not.

In fact, Red Hat panicked. The morning after Red Hat announced Thompson's departure -- about 120 seconds before the market was scheduled to open -- the software company issued a press release previewing the first quarter. Earnings, Red Hat said, would exceed $10 million, or 5 cents a share, 1 cent better than the Thomson First Call consensus expectation.

By setting some sort of record for the shortest time span between an earnings preview and the earnings release, we suspect that Red Hat has demonstrated how little it trusts its shareholders, and how little its shareholders trust Red Hat.

"There was a lot of scrutiny in the analyst community," says a Red Hat spokeswoman. "We felt it was important to address questions as quickly as possible." The company wanted, she says, "to allay some of the concerns that were coming out."

In the end, Red Hat wasn't completely able to allay those concerns. Perhaps smelling the company's fear, investors didn't rush back to embrace Red Hat's stock. At the end of normal trading Tuesday, Red Hat closed at $22.06 -- up from the after-hours lows but still 9% off of the previous day's close.

And after the quarter's actual numbers came out Thursday evening, investors took an even dimmer view of Red Hat. Sure, the company hit its 5-cent earnings target, thanks in part to a boost in other income. But Red Hat missed the revenue target it set three months ago. After hours, the stock fell nearly 8% to $20.64. Rock 'n' roll!