Can IBM’s Stock Rebound?

With shares of International Business Machines (NYSE:IBM) trading around $187, is IBM an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

IBM is an information technology company. The company operates in five segments: Global Technology Services, Global Business Services, Software, Systems and Technology, and Global Financing. Technology products and services are in high demand worldwide, as consumers want to be up to speed and companies always need the latest and greatest to stay ahead of the competition. Cloud computing has been hot in recent times, which has not been good news for IBM. Should the company want to hold on to its market share, it needs to make moves quickly and provide the technology products and services that worldwide consumers and companies demand.

IBM said it would commit $3 billion over five years to semiconductor research. The company said Wednesday that it plans to make microchips with smaller circuitry and more components that are faster and more energy-efficient. The company already spends about $6 billion a year on research and development. IBM hopes to shrink the size of the tiny circuits from 22 nanometers to 7 nanometers, about a thousandth of the width of a human hair. Researchers will also experiment designing chips using some unproven techniques that use quantum physics and that are inspired by the brain. While IBM plans to continue researching and licensing chips, the company signaled its intention to get out of the chip manufacturing business. It’s reportedly looking to sell its chip manufacturing plants in East Fishkill, NY and Burlington, VT to GlobalFoundries.

T = Technicals on the Stock Chart Are Weak

IBM stock has struggled to make significant progress in the last several years. The stock is currently pulling back and may need time to stabilize before heading higher. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, IBM is trading between its rising key averages which signal neutral price action in the near-term.

IBM

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of IBM options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

IBM Options

22.06%

96%

94%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Average

Average

September Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on IBM’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for IBM look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

-15.19%

11.63%

10.51%

11.4%

Revenue Growth (Y-O-Y)

-3.97%

-5.46%

-4.15%

-3.33%

Earnings Reaction

-3.25%

-3.27%

-6.37%

1.76%

IBM has seen increasing earnings and decreasing figures over the last four quarters. From these numbers, the markets have had conflicting feelings about IBM’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has IBM stock done relative to its peers, HP (NYSE:HPQ), Oracle (NYSE:ORCL), Microsoft (NASDAQ:MSFT), and sector?

IBM

HP

Oracle

Microsoft

Sector

Year-to-Date Return

0.45%

20.26%

5.23%

11.39%

10.33%

IBM has been a poor relative performer, year-to-date.

Conclusion

IBM is a global technology company that provides essential products and services to companies and consumers worldwide. The company said it would commit $3 billion over five years to semiconductor research. The stock has been struggling over the past couple of years and is currently pulling back. Over the last four quarters, earnings have been rising while revenues have been declining, which has produced conflicting feelings among investors. Relative to its peers and sector, IBM has been a poor year-to-date performer. WAIT AND SEE what IBM does next.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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