International Business Machines' (IBM) recent sales figures are a picture of a global problem that most major internaional U.S. companies are experiencing. It paints for us a picture of a leaner market over the next few quarters, and it is something investors should take note of.
This slowing world economy has taken its toll on the sales of products from snack foods to appliances. Companies as diverse as PepsiCo (PEP) to Textron (TXT) have consistently missed sales targets. When corporate America runs out of cost cutting ideas and the reality sets in that earnings are going to start shrinking now - because there is nothing else to cut - what are investors going to do? That cold, hard fact looks like it may be setting in. A majority of the companies in the widely watched Standard & Poor's 500 Index that have reported results so far have missed analysts' revenue forecasts.
IBM's recent fall from grace may be a projection of things to come for more companies in the coming quarters. The company missed sales forecasts for the fifth time on a row with a 5% drop in the third quarter. Why did this happen? Corporate customers have been cutting spending to cope with the economic challenge, and the trickle down effect eventually hits everyone. It is not a secret that Intel (INTC) is another corporate giant struggling with sales, as its revenue was down 5% for the quarter and its fourth quarter guidance was bleaker than analysts' forecasts.
So what is on the stage for 2013 for IBM and other corporate giants? Given the recent experience of revenue growth slowing down, it would appear to me that 2013 would be a flat year for businesses at best, and it would be advantageous to lower expectations on company performance for the year. As for IBM, I guess I would expect the same for many corporations at this point. I would expect a sideways move with highs and lows but no significant upward movement, at least for the first few quarters.
After a huge gap down in mid October, it has been moving down since then rather steeply, hanging on to bottom Bollinger Band for the last week. This huge gap down looks like it might be at least slowing down here soon. The RSI indicator has reached the over sold area around 31.80 and has moved sideways for the last 4 days, building a good foundation. It is almost like it is saying "Enough already!" The MACD indicator also looks like it has started to level out. All this makes sense since the stock dropped so viciously after the gap down. It cannot continue to move down that steeply indefinitely.
The Options Play
IBM is presently trading at $191.08, and I am going to follow the trend of the stock on this one.
- Buy the January 2013 put with a strike of '190' (priced at $6.60)
- Sell the January 2013 put with a strike of '185' (priced at $4.50)
- Net Debit to Start: $2.10
- Maximum Profit: $2.90
- Maximum Risk: net debit
- Maximum Length of Trade: 3 months
Reasoning behind the Trade
- Trade with the trend.
- Poor performance should continue for a few more quarters.
- I see no catalyst turning the company around in the next 5 months.