Going Long IBM The Dog

| About: International Business (IBM)

Summary

IBM has been a dog over past couple of years having done absolutely nothing for investors.

IBM is a Dog Of The Dow as it currently yields 3.5% while the stock is up 15.8% so far this year against an S&P 500 which has gained 7.7%.

With nearly enough cash on the balance sheet to cover all long- and short-term debt obligations I believe IBM can reinvigorate itself through some sort of acquisition.

International Business Machines (NYSE:IBM), otherwise known as IBM has been a dog over past couple of years having done absolutely nothing for investors. In fact, over the past five years the stock is down 15% while the S&P 500 is up 73.7%! But lately I have been thinking to myself that it has to be about time this behemoth begins to move upwards. I mean Warren Buffett purchased a stake in the name, he has to see something in it, right?!?

IBM has long been part of the Dogs Of The Dow investment theory because it has been a perennial high yielder. The Dogs of the Dow theory essentially has an investor purchasing the ten highest yielding stocks in the index and holding them for a year. The reason for the stocks being high yielders is because they have been underperformers for the prior year. These stocks usually end up outperforming the following year and the investor gets to keep the outsized dividend. IBM remains in the Dogs Of The Dow as it currently yields 3.5% while the stock is up 15.8% so far this year against an S&P 500 which has gained 7.7%.

If we take a look at the chart below we see that it appears IBM has formed an inverse head & shoulders pattern which is usually a bullish signal. My eyes tell me that the neckline is around $150 with the head at $120. Usually with a pattern such as this one can eventually see the distance from the head to the neck to the opposite direction once the pattern is completed. Which if $150 is the neck we can tack on the $30 difference between the head and the neck to get a stock that may hit $180.

The stock is relatively inexpensive as it is trading 13x last year's earnings and 11.4x next year's earnings estimates. The fact that it is inexpensive on an earnings basis and that it is making a bullish pattern had me wanting to enter the stock. I'm not too concerned about the dividend either as the company is paying $5.60 annually which is covered by $12.27 in trailing earnings, or from a cash flow perspective the company has paid $5.2B over the past year in dividends off of $18.6B in operating cash flows. With the dividend yielding higher than a 10-year treasury I still believe it is a decently safe investment.

The earnings and revenue growth story has been slowing down so that is a bit of a concern. But they should be able to turn things around relatively soon as they have been trying to execute their strategies on the cognitive learning side in addition to the cloud side. With nearly enough cash on the balance sheet to cover all long- and short-term debt obligations I believe IBM can reinvigorate itself through some sort of acquisition, perhaps in the cyber security arena.

So what I ended up doing was putting in an options trade in the name rather than owning the stock outright. In mid-September I ended up purchasing the November $160 call but I subsidized the purchase by writing the November $165 call and November $145 put for a net credit of $0.59. If the stock expires between $145 and $160 I end up keeping the $0.59.

I was hoping that in October the earnings call would have been a great catalyst for the name either by beating earnings and guiding higher or by announcing some sort of corporate restructuring such as a spinoff of the higher growth businesses into a different entity. Alas, the earnings announcement came and passed with no movement. I look forward to seeing how the trade plays out seeing that is currently sits at $159.29. Thank you for reading and I look forward to your comments!

Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned. This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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