Investors Throw Book at Stocks - TheStreet

Wall Street doesn't like books it can't read.

That's the lesson of Tuesday's sharp marketwide selloff, which decimated the stocks of some companies whose past accounting and disclosure practices have had Wall Street types scratching their heads. These companies, rightly or wrongly, have become the latest victims of the

Enron

saga: With billions of dollars down the drain in the collapse of that once-highflying (and inscrutable) energy company, investors have decided that any business that isn't absolutely transparent isn't worth betting on.

Among the leading decliners in big-cap land Tuesday were

Tyco

(TYC)

,

Cendant

(CD)

,

WorldCom

(WCOM)

and

Calpine

(CPN)

.

The common thread among these onetime highfliers: All rose to prominence by acquiring businesses using their once-lofty shares -- prompting critics to gripe that the deals made it impossible to determine just how fast the companies were really growing. As a result, short-sellers made hefty bets against the companies, wagering that growth would inevitably slow once their stocks sagged. Tuesday those bets began to pay off, even though there was no news that shed light on the companies' fundamentals.

"Everybody is waiting for the other shoe to drop," says Fuji Futures strategist Phil Ruffat. "It makes them do what the market doesn't like, which is stop and wait before they buy."

Unfriendly Spotlight

Cast in the lead role Tuesday were Tyco and Cendant, which headed the NYSE's list of most-active stocks. Tyco, which plunged $9.39, to $32.61, wiping out $19 billion in market value, defended its decision to pay a director $10 million to facilitate its acqusition of finance company CIT Group; corporate governance worries have hit investors' radar screens since Enron's bankruptcy raised questions about the actions of its auditors. Cendant, subject of rumors that a newspaper was planning a negative story on its accounting, said it was unaware of any forthcoming article and that fourth-quarter results, due Feb. 6, should beat estimates.

Rumors about accounting, said one trader, "are not a good thing to be tied into ever, but it's even worse these days."

It's impossible to know if the rumors about Cendant, for instance, really are specious. Indeed, there's been no actual evidence of any improprieties at any of these companies.

But it's clear that in the current environment, Cendant was a sitting duck for this kind of chatter. Highly acquisitive, boasting a number of off balance sheet partnerships and holding over $6 billion in debt, Cendant also was the biggest investor in

Homestore.com

, a former Internet highflier that has run into accounting trouble. Nor does it help that Cendant itself has had trouble with its own books in the past -- many investors were burned badly in 1998 when accounting irregularities sent it tumbling. So now the stock has one of the largest short positions on the Big Board.

Cendant shares rebounded from their lows of the afternoon after the company said it expects to boost 2002 financial targets. But make no mistake: This selloff was never about financial targets, per se.

Take Calpine, the onetime Enron competitor whose shares dropped 9% to $11.01 Tuesday despite a lack of corporate and industry-specific news. Calpine shares have dropped throughout 2002 as investors worried that its cash-hungry energy-generating plans would force the debt-burdened company back into the market with a dilutive stock sale. Meanwhile, Wall Street continues to wonder

how much stock it should put in Calpine's forecasts.

That's because where once people enthused about the synergies created by acquisitions, now they worry about what the real internal growth is. Tyco has gone so far this year as to make plans to split itself into four, but that has done little to assuage concerns that the company used acquisition-accounting tricks to show growth that wasn't there. Tyco has maintained in the past that its accounting practices are conservative.

We Give You the World

Simple accounting speculation wasn't the only factor at play Tuesday. Other market-based jitters jarred WorldCom, as investors sorted through a handful of rumors regarding the status of the nation's No. 2 long distance company and CEO Bernie Ebbers.

The rumors were obviously fanned by Monday's collapse of

Global Crossing

, another former New Economy favorite, and by the ongoing Enron debacle. While most of the speculation was dispelled by some analysts and a company representative, WorldCom nonetheless took a vicious beating, sliding 15% to $10.50. The stock, which set a 52-week low Tuesday, is off 25% for the year.

Ranked by level of severity, the rumors went like this:

  • Imminent bankruptcy. Not so fast, says WorldCom: The company insists it has sufficient cash flow and $10 billion in cash on hand.
  • Removal from the S&P index. Not likely, since WorldCom has been a good citizen and even at its current low is capitalized at $31 billion.
  • Debt agency downgrade. S&P says not us. Moody's didn't return a call seeking comment.
  • The AOL (AOL) service contract is in doubt. Nope: A company source said the dialup and transport business isn't in jeopardy.

By far the juiciest speculation went into the notion that Ebbers was facing a margin call on his extensive stock holdings. According to a Lehman Brothers note, if WorldCom stock falls below $10, it triggers a margin call requiring Ebbers -- or as in a past episode, the company -- to cough up the cash to cover the loan. WorldCom declined to comment on Ebbers' loan status.

"If the

margin call is the reason for the panic selling, it may be a good time to clean Bernie out and move forward," says a Boston-based money manager who has a short position in the stock. "It's the most positive of all the rumors I heard."

Margin calls occur when people buy stock with money borrowed from a broker. Typically repayment is ordered when the value drops below a specified threshold. In the summer of 2000, WorldCom bailed out Ebbers with a $150 million loan when his creditors came calling. This time around, Lehman estimates the total value of the loan to be $180 million.

No matter what happens to Ebbers and his margin loan, though, expect WorldCom's name to keep coming up as investors work through their Enron phobia.

Senior writer Scott Moritz contributed to this report.