IBM Tumble Shows Investors Quick to Punish Stumbling Companies

IBM's Y2K warning aroused ire in part because the company dismissed Y2K earlier in the year.
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In the past two weeks investors have been quick to punish companies that stumbled. Yet some of these companies got off relatively easily for good behavior in the past.

Take

IBM

(IBM) - Get Report

. Big Blue's third-quarter earnings report came in line with expectations but the company warned of a dire outlook for the next six months. The stock fell 16, or almost 15%, to 91.

IBM is not alone in raising investors' ire. On Monday,

Lexmark

(LXK)

reported earnings that matched analysts' expectations, but investors punished the stock because the company warned that its fourth quarter could be chaotic due to production transitions and the Year 2000 problem. It fell almost 30% Monday, before bottoming out at 65, down 28. Since then it has regained some of its early losses. On Thursday it closed up 1 5/8, at 73 3/8.

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Perhaps it is the specter of Y2K. Investors may be punishing IBM and Lexmark for dismissing Y2K earlier in the year -- only to blame the phenomenon now at the last minute. Or perhaps it's because investors who rewarded IBM's aggressive accounting in the past are less forgiving when the company offers a weak fourth-quarter outlook. "The Street seems to flee as soon as there is any kind of a slowdown in companies with high multiples," says Gary Helmig, a hardware analyst with

Soundview Technology Group

.

Weathering preannouncements isn't easy for retail investors lost in a sea of trigger-happy fund managers unwilling to let potential blowups hurt their bottom lines. "There's a shoot-first, ask-questions-later attitude, especially if you're in the performance game," says Hugh Johnson, chief investment officer at

First Albany

. "A lot of managers don't care what the company's doing. They care about performance."

IBM's shortfall is mainly due to its failure to convince large corporations to buy its high-end hardware products like the AS/400. Hardware sales, which at $8.8 billion for the quarter represent 42% of IBM's total revenue, fell 1% from a year ago.

"The truth is, preannouncements can create a dark cloud over a company's stock for a very long time," Johnson says. And it's never easy to find the right time to jump back into the stock. "Confidence has to be restored by results. Look how long it's been that

Gillette's

(G) - Get Report

been in the doldrums. Many of us thought that by jumping after it posted its initial decline, we'd look like heroes. We didn't. We looked like goats."

Gillette warned of slowing sales on Sept. 30, 1998, blaming weakness in overseas markets. The stock actually picked up ground. Gillette warned of troubles again on April 5, and this time its shares have been steadily falling.

Semiconductor giant

Intel

(INTC) - Get Report

missed earnings by two cents a share, but investors did not punish it so severely.

Dell

(DELL) - Get Report

only fell 3, or 5%, after it warned Monday about the impact of rising memory chip prices due to the Taiwan earthquake.

Dell may have benefited from its near-perfect track record. The earnings warning was its first in six years. The key is to offer a positive outlook at the same time as delivering bad news, says Bill Fleckenstein, who runs the Seattle-based

Fleckenstein Capital

. (Fleckenstein is short Dell and

Gateway

(GTW)

.) "If Dell had admitted that demand may be an issue in the fourth quarter, than you may have seen it get hit harder," he adds.

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