Mark Smith's Analyst Perspectives

The Headquarters Effect and Salesforce.com

Posted by Mark Smith on Dec 24, 2010 11:38:41 AM

Wall Street has many leading indicators to work with, some serious – such as housing starts and the purchasing managers’ index – and some done a bit tongue-in-cheek. One of the latter is the Super Bowl Indicator, which says that if a team from the original National Football League wins the game, the market will be up for the year, but if an old American Football League team wins it, the market will be down. The amazing thing is that so far this heuristic has an accuracy rate better than 75%! On the other hand, over time some venerable weather vanes become unreliable. For example, the “hem line theory” (that stocks rise and fall with the direction of this aspect of women’s fashion) lost its (ahem) legs, partly because fashion these days is much more anarchic.

Then there’s the Headquarters Effect, which holds that once a company announces that it’s building a new headquarters, you’d be wise to sell its stock. One rationale for this indicator is that companies tend to make these decisions at or near the high point of their business cycle. So even though correlation is not causality, the two events happen in concert frequently enough to make it a reliable predictive indicator. And there are other reasons why people who trade the market believe in the Headquarters Effect. One is that any move proves to be a distraction to senior management: Once the new location is announced, the leaders spend a large portion of their time jockeying for offices and planning their office décor, and when they make the move, they spend too much time assessing fellow executives’ relative status based on office location and décor. In other words, human nature comes into play, which is seldom a stabilizing factor.

Personally, I’ve found the Headquarters Effect to be very reliable. I remember talking to a friend who told me his wife had just started working on designing the interiors of an as-yet-unannounced new headquarters of a company that I covered. Although it was insider information, I should have downgraded the stock right then because it would have been very close to the high of the stock in that cycle. It doesn’t even have to be a brand-new building. When, more than a decade ago, Hyperion Software announced it was relocating up the street a bit on Long Ridge Road in Stamford, Conn., I called up the CFO to warn her that the stock was going to tank because of the move. She protested that they weren’t buying the building and that they needed more space because people were doubled up in offices. I held my ground, and about nine months later, after the move had been made, the company announced disappointing earnings, and the stock sunk like a stone. (Of course, my inner lawyer forces me to note that past performance is not indicative of future results.)

I mention the Headquarters Effect because of Salesforce.com’s recent announcement that it will be moving across town in San Francisco into a huge new campus. Since the announcement, the company’s share price has increased, but this indicator is more long-term in nature. The stock is currently trading in the 130s. I’ll check back on the price next year at this time.

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Regards,

Robert Kugel – SVP Research

Topics: Salesforce.com, Operational Performance Management (OPM), Cloud Computing, Enterprise Software, Business Intelligence (BI), Business Performance Management (BPM), Financial Performance Management (FPM), Information Management (IM), IT Performance Management (ITPM), Sales Performance Management (SPM)

Mark Smith

Written by Mark Smith

Mark is responsible for the overall direction of Ventana Research and drives the global research agenda covering both business and technology areas. He defined the blueprint for Information Management and Performance Management as the linking together of people, processes, information and technology across organizations to drive effective results. Mark is an expert in technology for business from Performance Management, Business Intelligence, Analytics to Information Management across finance, operations and IT. Mark has held CMO, product development and research roles at companies such as SAP, META Group, Oracle and IRI Software. He has experience across major industries including banking, consumer products, food and beverage, insurance, manufacturing, pharmaceutical and retail and consumer services.