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IBM Almost Singlehandedly Sabotages the Dow

By John Maxfield - Apr 19, 2013 at 3:03PM

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Here's why the Dow is down even though most of its stocks are up.

Don't let today's performance of the Dow Jones Industrial Average (^DJI -0.75%) fool you. While the blue-chip index is down slightly, 24 of its 30 components are higher late in the trading session. The broader S&P 500 is also making moderate gains.

The discrepancy owes to the Dow's peculiar construction. Unlike other stock indexes like the S&P 500, which use market capitalization to weight the component parts, the Dow's weighting is based strictly on share price. As a result, the most expensive stock carries the most weight, and the cheapest stock the least.

The reason the Dow is underperforming its broader counterpart, in turn, is that its most heavily weighted component, IBM (IBM -2.47%), is getting absolutely slammed today, down by 8% in afternoon trading. Selling for $190 per share, the technology and business services giant accounts for almost 11% of the Dow's daily deviations.

After the market closed yesterday, IBM reported earnings that are clearly not sitting well with investors. While the company's first-quarter net income rose by 3% to $3.4 billion, or $3 per share, it nevertheless missed analyst estimates of $3.05 per share. And on top of that, its quarterly revenue declined by 5% on a year-over-year basis.

Following the release, analysts rushed to cut price targets. According to Reuters, an analyst at Stifel Nicolaus cut his target by a dollar to $240, while one at RBC cut his by $15 down to $200 and a Deutsche Bank analyst wrote in a note to clients that "the IBM miss is a decidedly negative read through for the entire IT hardware segment and we are incrementally more cautious on the sector; particularly those with a March quarter end."

Adding to the Dow's woes are shares of General Electric (GE 0.72%) and McDonald's (MCD -0.89%), which are down by 4% and 2%, respectively. While GE's earnings, announced earlier today, increased by 16% on a year-over-year basis and finished in line with analyst estimates, the company tempered forward guidance, thanks in large part to Europe.

McDonald's similarly reported underwhelming results. As The Wall Street Journal noted, profit at the fast-food giant "barely budged" in the first three months of the year. And to add insult to injury, its pivotal same-store sales figure fell by 1% on a year-over-year basis. According to CEO Don Thompson, "While the Company's results for the quarter reflected difficult prior year comparisons and the ongoing impact of global economic headwinds, we continue our efforts to build market share and deliver sustained profitable growth for all stakeholders."

Suffice it to say, it's been a trying week for many investors. The silver lining is that with many blue-chip stocks now finished reporting first-quarter results, the market could soon settle back down.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$31,253.13 (-0.75%) $-236.94
International Business Machines Corporation Stock Quote
International Business Machines Corporation
IBM
$129.66 (-2.47%) $-3.28
McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$229.00 (-0.89%) $-2.05
General Electric Company Stock Quote
General Electric Company
GE
$75.74 (0.72%) $0.54

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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