There have been several heated debates in various investing forums about the future of IBM (IBM). While some believe the company is on the right trajectory to grow its operations over the coming years, others feel that the technology giant is in a state of decline. However, its large institutional owners seem to have picked sides already. Latest 13-F filing data reveals that this class of sophisticated investors sold IBM stock in large quantities in the last reporting cycle. This may not seem encouraging for investors with a medium-term horizon but I believe it opens up a buying opportunity for long-term investors.
(Source: Bigstockphoto, Image license purchased by author)
Let me start by saying that institutional investors tend to have certain tools at their disposal – such as large research teams, industry connections and access to company managements among other things – that gives them an edge over retail investors. So, tracking institutional activity can sometimes provide us with leading insights about where the company and its stock could be headed next. It also highlights how bullish or bearish this class of sophisticated investors is on a particular stock or a company.
Now coming back to IBM, it’s evident that institutional investors offloaded its shares in massive quantities. Sure, a few entities bought the technology giant’s shares over the last 13-F reporting period but the broad swath of institutional investors sold IBM stock in far greater quantities. The screenshot attached below should put the size and scale of this selloff in perspective; institutions collectively bought about 35.5 million shares but they sold a whopping 83.7 million shares making it an approximate split of 1:2.3.
The chart attached below highlights the trading activity of its 30 largest institutional owners. About 16 institutions increased their exposure to IBM while the other 14 reduced their positions in the name and so I would call it an even split. Besides, the magnitude of positions being added or reduced is in its extremes as well, ranging from +70% to (43%), which suggests that there are a substantial number of institutions who think that IBM is no longer a sound investment option for their portfolios.
Why’s This Happening?
The next question would be why did institutional investors sell IBM stock in such large quantities in the first place. Well, there are broadly two chains of thought that are fueling the bearish narrative when it comes to investing in the tech giant. First, IBM as a business is showing signs of stagnation. The chart attached below would highlight that none of its operating segments have registered any material revenue growth of late. This makes IBM seem like a poor option for investors seeking growth opportunities.
Secondly, IBM announced the buyout of Red Hat back in October which is within the time frame of the last 13-F reporting cycle. So, it’s also possible that a broad swath of institutional investors sold their positions perhaps because they felt IBM overpaid for this deal. This bearish narrative has been peddled in many investing forums as well so I wouldn’t be surprised if institutional investors also felt that way.
But this is where yours truly, and maybe also institutions who increased their positions in IBM over the last 13-F reporting cycle, would like to differ. IBM has made many strategic bets over the past few years to grow its presence in the cloud space and its acquisition of Red Hat is one such strategic investment.
One can make the case that the technology giant overpaid for the acquisition and I won't even argue with that. However, the technology giant now has a realistic shot at growing its revenues once again with this buyout and it may even be able to satisfy growth-starved shareholders in the process.
The chart attached above highlights IBM’s cloud revenue coming in from strategic imperatives in comparison to its overall revenues. Clearly the former metric has been growing considerably over the recent past, and my guess is that it would continue growing in the future as well with the acquisition of Red Hat. I used the word “guess” because we still don’t know how IBM would integrate Red Hat in 2019, but overall, I still maintain that IBM is a good stock to own due to its initiatives in the cloud space
(Data from Yahoo Finance, Created by Author)
But let’s look at the chart attached above; it indicates that IBM’s shares plunged dramatically over the last 13-F reporting cycle and they’ve still yet to recover from these losses. There were two major events relating to IBM that took place in the last 13-F reporting cycle, that may have driven institutional selling:
- It issued a disappointing Q2 earnings report,
- It announced the acquisition of Red Hat
IBM's shares seem to be distressed of late, driven lower by market-wide fear, uncertainty and doubt, and I believe that investors with a long-term view have a chance to capitalize on this excessive bearish sentiment by accumulating its shares.
Granted, a lot of institutional investors sold off or reduced their exposure to IBM in the last 13-F reporting cycle. Maybe they don’t like the company anymore or maybe they just don’t like its evolved risk profile. But whatever the case may be, this certainly doesn’t seem like an encouraging sign for long-side investors at first glance.
However, let’s not also forget that 16 of IBM’s 30 largest investors actually increased their exposure to the technology giant by as much as 70%. I’m confident that they must have a good reason for doing so, and investors should consider that as well before pressing sell on IBM right away.
With that said, I continue to believe that IBM’s cloud vertical will be its next growth frontier and its buyout of Red Hat is a critical step in the right direction. I would recommend readers and investors with a long-term view consider accumulating IBM's shares while they are still distressed.
Author's Note: I'll be writing another report on IBM's cloud initiatives next week, you can click the "Follow" button to stay updated. Thanks!
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.