IBM gaped up because of better than expected fourth quarter numbers and this brings up a new question. After the stock grew more than 5% in one week, investors want to know if it is still a good buy. Brian Marshall, an analyst with ISI Group, had this to say:
"$64,000 Question is what to Pay for Big Blue. Even though the company has demonstrated operational discipline, consistent earnings growth in the 8% to 10% range, and a dividend, it does not merit its current multiple. IBM is fairly valued at about $190."
I believe the recent gap up was reactionary and the dust will settle soon. Some investors may take profits and other may decide the tech giant is a good long-term hold. So I would not be surprised at a pullback. As a long term investor, it is important to understand how the services a company provides affects its clients. Becoming familiar with this gives one a good perspective on the company's product/service and its potential for future growth. IBM has been transitioning into the "cloud" service through product and acquisition over the last few years.
What does that mean? How is it able to help companies? Here is a great example of what it does for its clients.
Fluor Corporation has 43,000 employees globally involved in engineering, construction and project management. One of the great attributes of the company that has made it so successful is the employee's innovative and creative contributions toward the design, building and maintaining many of the world's most challenging and complex capital projects. Sharing knowledge, experience, and expertise globally throughout the organization in real time is important. This is especially true when difficult decisions need to be made right there on the work site quickly.
The strength IBM brings to its business clients is the ability to use the social sphere to empower employees to engage in more business. This has improved productivity and encouraged innovative ideas in the organizations. I have read a couple other places about an article by Josh Bersin on a research report he wrote called: "The Science Fit: Using Psychology to Replicate High Performance." The report provides examples of high-performing companies that have built the tools and systems to help managers increase employee performance. In this report, people-focused businesses generated 28 percent more effectiveness per employee and had 40 percent lower turnover rate.
This is how it has been working for Fluor Corp. Employees have joined the "Fluor social network" uploading social information including experience and expertise so employees can make the connections they need to make. Now the Fluor workforce can connect and collaborate as they need to. With over a thousand collaboration spaces and 2,000-plus active forum participants, the company is unlocking employee innovation, creativity, and energy - all with the help of IBM services. In this case it is IBM Connections and WebSphere Portal.
Keeping a larger perspective on a service like this and seeing its potential for future business is very important for the investor. Global business structures are changing and IBM is at the front helping the company's employees connect, improving business function and service.
Technically Speaking
The huge gap up on the nice surprised fourth quarter earnings and revenue report has investors scratching their heads as to what will happen with the stock now. I would not be surprised on a short-term pullback as some investors may take profits. The stock does looks over bought in the RSI but the MACD MA's have momentum and does not look like it will slow down soon. I am not surprised at the move up and the last three days after the gap is still moving up. Since it continues to move sideways, I would expect it to continue up.
(click to enlarge)
Example of A Short Term Income Strategy
IBM is a good example of how a stock can climb, making money for a long-term investor. Yet the investor can also take advantage of a short-term income play using options. That is exactly what happened in the example I gave when I wrote my last article on IBM in mid December. The article was about new technology and suggested a short term income play. This was the play I suggested:
A Short-Term Income Play
The consolidating phase looks like a typical symmetrical triangular pattern. The symmetrical triangle, which can also be referred to as a coil, usually forms during a trend as a continuation pattern. The pattern contains at least two lower highs and two higher lows. The stock is presently trading at 194.07 and at this point I would expect a pullback.
- Buy a January 2013 put with a strike of '195' (priced at $4.15)
- Sell a January 2013 put with a strike of '190' (priced at $2.16)
- Net Debit to Start: $1.99
- Maximum Profit: $3.01
- Maximum Risk: net debit
- Maximum Length of Trade: 1 month
Reasoning behind the Trade
- The stock is still consolidating at the top of Bollinger Bands and I expect a pullback.
- Weak overall market performance contributes to the pullback.
This trade was made in mid December when the stock was trading at 194.06. At the end of December, when it dipped under 190 I reversed the trade and made a nice profit on the stock. Since that time the stock has moved up and the huge gap up has it presently trading at 204.98. This is a great example of ways to make money on one's investments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
