The Five Dumbest Things on Wall Street: March 14

5. WellPoint Predictions Prove Offpoint

WellPoint(WLP Quote - Cramer on WLP - Stock Picks) looked neither well nor particularly on point when it slashed its 2008 forecast Tuesday, sending its shares down nearly 30% and infecting the rest of the sector with a case of investor jitters.

Sure, slashed guidance is a lot less fun than boosted guidance or an upside surprise. But it happens on Wall Street, particularly in the tenuous business of health insurance. Two things stand out about WellPoint's delivery of bad tidings, though.

First, the company fessed up that it had miscalculated its own medical cost ratio when pricing its insurance. Insurance companies have to know in advance what they're going to charge clients, so an itty-bitty increase in costs can kill an insurer's paper-thin margins. Add in a price war with sector rivals like UnitedHealth (UNH Quote - Cramer on UNH - Stock Picks) and Humana (HUM Quote - Cramer on HUM - Stock Picks), and suddenly profits fall far below forecasts. WellPoint's simple math mistakes wound up costing shareholders millions. Oops.

That's bad, but to double down on dumbness, WellPoint had earlier convinced shareholders that it saw costs decreasing and profits rising. It's one thing to revise estimates, but it's another game entirely to promise a bull run only to lead investors off a cliff.

Rest assured, though, that WellPoint's prognosis is looking up. Says CEO Angela Braly, "While we are disappointed with having to revise our 2008 outlook, we are still expecting growth this year ... we are taking actions and making investments in our business to further improve our performance during the balance of this year and beyond."

Dumb-o-meter score: 79. "Actions" and "investments in our business." Sounds like a winning strategy from a company that knows what it's doing.

« Previous Page

1 2 3 4 5

Next Page »