Sometimes, Wall Street logic baffles me. Say you have companies A, B, and C all operating in the same industry. They're all considered competitors. Then, one fine day, company A reports some wonderful news. What would you expect the effect of this news to be on companies B and C?
I'd expect companies B and C to suffer declines in their market cap, because if company A is competing with them, and company A is winning, then it follows that companies B and C are losing. Or at the very least, companies B and C should not benefit from the good news accorded to company A, because they are, after all, opposing parties.
When smacked in the face with the logic of these relationships, investors will generally act accordingly. Earlier this month, for example, when Nissan (NASDAQ:NSANY) reported its best May sales ever, and Ford (NYSE:F) and GM (NYSE:GM) simultaneously reported sales declines, Nissan went up, while Ford and GM went down. Logical.
But give Wall Street an inch of wiggle room, and it tends to take a mile of overgeneralizations. Bad news for one competitor in a group? "Sell 'em all," the Street says. Good news for one? "Everybody party!" Last Monday, for example, steel producer Nucor (NYSE:NUE) issued an earnings warning, and before you could say "hot rolled coil," the prices of U.S. Steel (NYSE:X) and Mittal Steel hopped off a cliff right alongside Nucor's.
Often, it's only after the itchy trading fingers have clicked their "buy" and "sell" buttons that investors start realizing that even though ravens, grackles, and penguins all have black wings, they're not necessarily birds of a feather and shouldn't, perhaps, be flying together after all. That's when you'll see a situation like what happened yesterday with for-profit educator Career Education (NASDAQ:CECO). Like all its educating brethren, the stock took a hop, skip, and jump higher on the Wall Street playground Monday, when news broke that the Department of Justice had cleared competitor ITT (NYSE:ESI) of fraud charges.
Yesterday, however, Career Education gave investors an abrupt reminder that there's a reason its ticker symbol is different from ITT's: Career Education confirmed that it remains under investigation by the Department of Education. Startled by the obvious, investors promptly sold Career Education stock nearly all the way back down to where it had been before ITT reported its good news.
The moral of today's story: Before assuming all your birds should be flying together, make sure each of them actually has feathers. One of them just might be a penguin.
For more on ITT's story, read:
Fool contributor Rich Smith does not own shares in any of the companies mentioned above.
