IBM: WHAT TO DO WITH BIG BLUE?
FUNDAMENTAL PICTURE: CHALLENGING
With a consensus recommendation to HOLD and an average consensus price upside of only +10%, it seems the average analyst is not too keen on owning this name. This could be explained by the diminishing topline (5-yr CAGR -5.65%) or the decreasing bottom line (5-yr CAGR -1.0%), or a combination of both reinforced by ROE trending down (albeit from a high level), as well as negative cash-flow growth. In all cases, the market seems to believe that this is not an asset to own on any fundamental basis.
TECHNICAL PICTURE: QUITE POOR
IBM Looks technically weak on most time frames, with most technical indicators negative. In particular, mind the negative cross-over of MA20/MA50 in December 2014 and MA20/MA100 in March 2016. Main support from here seems to be the MA200 at $128/share on the monthly chart, corresponding nearly exactly to the bottom of the descending wedge (red line on the long term chart below). Intermediate levels down are $148 / $142 / $138. On the medium-term weekly chart, IBM looks like it reached an intermediary top at $182.79 on February 16 of this year. Since then, the stock has been selling-off hard on significant, above-average volume. On the daily chart, IBM’s weakness is confirmed and reinforced by multiple and significant gaps down: -4.87% on April 19 and -3.47% on May 5. The former corresponds to the most recent earnings disappointment, when the stock gapped down in 4x average volume, and failed to properly recover. The stock currently looks mildly oversold on the medium-term chart and much oversold on the daily chart (RSI = 12.85).
FLOW PICTURE: SCARY?
When Mr. Buffett sells out of his structural position on Big Blue, this sends a negative signal and bodes one question: If Mr. Buffett does not believe in it, should we? Most of the time, holding contrarian positions in the face of influential institutional investors has proven dangerous, if not painful. This a red flag for any ownership of this stock.
MACRO PICTURE: DOWN
The indices are currently looking toppish, and signs of divergence are starting to appear between the technology leaders (NASDAQ) and the rest of the market (SPX, DJIA). This lack of breadth with technology thrusting forward against all odds begs for some adjustment. Will it be a time consolidation, a downward adjustment (selloff), or a coordinated move above the current resistances (breakout)? As we do not have the answer to this question, proper risk management tells us to continue to expect a consolidation until the latter and third scenario (breakout) is proven true. In the meantime, we would like to remain very selective with any new positions. In particular, it makes sense to be particularly careful with weak stocks, as they are likely to become weaker should the market consolidate.
CONCLUSION ON IBM: STAY AWAY OR USE OPTIONS
In conclusion, the main elements going for IBM at the moment are the fact that its valuation is low relative to the market, and that it looks oversold, none of which is reason enough to build a position in it at this time - Valuations can go lower, and an oversold condition can persist for a long time. There appears to be more attractive assets to own in the current market than Big Blue. For those looking to benefit from an eventual short-term rebound in the stock, prefer the use of options in order to minimize risk and exposure. In particular, note that the volatility has remained quite low even in the context of the stock going down, hence encouraging the purchase of options. For about $1/share, one can buy a slightly OTM call which should appreciate in case the stock pops (even though it remains unclear at this time what could trigger such a pop).
With a consensus recommendation to HOLD and an average consensus price upside of only +10%, it seems the average analyst is not too keen on owning this name. This could be explained by the diminishing topline (5-yr CAGR -5.65%) or the decreasing bottom line (5-yr CAGR -1.0%), or a combination of both reinforced by ROE trending down (albeit from a high level), as well as negative cash-flow growth. In all cases, the market seems to believe that this is not an asset to own on any fundamental basis.
TECHNICAL PICTURE: QUITE POOR
IBM Looks technically weak on most time frames, with most technical indicators negative. In particular, mind the negative cross-over of MA20/MA50 in December 2014 and MA20/MA100 in March 2016. Main support from here seems to be the MA200 at $128/share on the monthly chart, corresponding nearly exactly to the bottom of the descending wedge (red line on the long term chart below). Intermediate levels down are $148 / $142 / $138. On the medium-term weekly chart, IBM looks like it reached an intermediary top at $182.79 on February 16 of this year. Since then, the stock has been selling-off hard on significant, above-average volume. On the daily chart, IBM’s weakness is confirmed and reinforced by multiple and significant gaps down: -4.87% on April 19 and -3.47% on May 5. The former corresponds to the most recent earnings disappointment, when the stock gapped down in 4x average volume, and failed to properly recover. The stock currently looks mildly oversold on the medium-term chart and much oversold on the daily chart (RSI = 12.85).
FLOW PICTURE: SCARY?
When Mr. Buffett sells out of his structural position on Big Blue, this sends a negative signal and bodes one question: If Mr. Buffett does not believe in it, should we? Most of the time, holding contrarian positions in the face of influential institutional investors has proven dangerous, if not painful. This a red flag for any ownership of this stock.
MACRO PICTURE: DOWN
The indices are currently looking toppish, and signs of divergence are starting to appear between the technology leaders (NASDAQ) and the rest of the market (SPX, DJIA). This lack of breadth with technology thrusting forward against all odds begs for some adjustment. Will it be a time consolidation, a downward adjustment (selloff), or a coordinated move above the current resistances (breakout)? As we do not have the answer to this question, proper risk management tells us to continue to expect a consolidation until the latter and third scenario (breakout) is proven true. In the meantime, we would like to remain very selective with any new positions. In particular, it makes sense to be particularly careful with weak stocks, as they are likely to become weaker should the market consolidate.
CONCLUSION ON IBM: STAY AWAY OR USE OPTIONS
In conclusion, the main elements going for IBM at the moment are the fact that its valuation is low relative to the market, and that it looks oversold, none of which is reason enough to build a position in it at this time - Valuations can go lower, and an oversold condition can persist for a long time. There appears to be more attractive assets to own in the current market than Big Blue. For those looking to benefit from an eventual short-term rebound in the stock, prefer the use of options in order to minimize risk and exposure. In particular, note that the volatility has remained quite low even in the context of the stock going down, hence encouraging the purchase of options. For about $1/share, one can buy a slightly OTM call which should appreciate in case the stock pops (even though it remains unclear at this time what could trigger such a pop).
Comment:
The stock looks like it is trying to form an intermediate bottom at $150, right in the middle of the wedge formation. This having been said, the overall orientation remains technically down according to most indicators I follow. In addition, the potential rebound is taking place in low volume, which gives it less credence. A "long-call" options strategy might still make sense here (long ATM or slightly OTM call on the June maturity), to play an eventual continuation of the rebound in the context of the market breakout which took place yesterday. However, there are better stocks out there.
Comment:
As the market races higher, IBM remains slightly above its current, temporary floor at $150. In such a trending market, it seems more valuable to stick to leaders/winners than to chase value which could take time to unlock. Some short-term indicators may have turned positive since I initiated this thread, but BIG BLUE still needs a catalyst for any further upside, and such catalyst is nowhere to be found for now.
Comment:
IBM continues to underperform in muted volume. Its perceived value, and borderline oversold status, do not seem to currently justify an interest from investors. In reality, there are many themes driving the market out there, and we may have to wait for market exhaustion or other, company-specific catalysts, to see a pickup in BIG BLUE. For now and until such catalysts become clearer, it seems sound to stay on the sidelines.
Comment:
BIG BLUE getting dangerously close to the critical $150 support, as it continues to underperform the market in above-average volume. Stay away for now.
Comment:
The stock has been attempting -so far, successfully- to build a support base at $150. Against all odds, it was up on reasonable volume on Friday, bucking the trend of the Tech sector and the general market. A possible explanation would be investors looking for value in Tech, as they take profits after the formidable run of the FANGs and Co. IBM, the battered candidate looks like an ideal target. At the 154.10 close, Friday's move stopped a hair short of the 154.20 breakout level. While we start to warm up to IBM after Friday's move, we would like to see it close above 154.26 before we take action, and recommend to stay on the sidelines for now. For those eager, itchy trading fingers, the following near-zero-cost-options strategy provides a sensible risk/reward at virtually no cost:
1. Buy the Jan'18 $165 call (7% OTM) = $3.50/Share
2. Sell the Jan'18 $135 put (-12.4% OTM) = $3.35/Share
CONCLUSION: At 0.15/Share (10bp or the equivalent of a very low trading commission), buy yourself any potential upside in the shares, or the possibility of going long the stock 12.4% lower, until Jan next year.
1. Buy the Jan'18 $165 call (7% OTM) = $3.50/Share
2. Sell the Jan'18 $135 put (-12.4% OTM) = $3.35/Share
CONCLUSION: At 0.15/Share (10bp or the equivalent of a very low trading commission), buy yourself any potential upside in the shares, or the possibility of going long the stock 12.4% lower, until Jan next year.
Comment:
Trade closed: target reached:
Stopping this thread and opening a new one as a consequence of the breakout in the shares now warranting a new perspective on the Big Blue.
