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IBM Under Heavy Accumulation Since December

Paul Franke profile picture
Paul Franke


  • The Red Hat acquisition and a new innovation-focused CEO may lead to a strong period ahead for the stock.
  • Growth in cloud sales, AI development and blockchain technologies may drive IBM's business fortunes in the next decade.
  • Heavy investor accumulation trends are apparent in the momentum indicators I have followed closely over the last five months.

I want to start by saying I really don’t like the excessive debt carried by International Business Machines (NYSE:IBM). If this was the only variable in picking a winner or loser, IBM would be a slam-dunk bearish choice. $65 billion in debt, $133 billion in total liabilities and a negative -$52 billion in tangible book value at the end of March are a lot to swallow. However, that’s not how stock picking works. Successful investors need a complete picture, a list of the pros and cons. Hardly ever does an investment in an individual company fit all the parameters of the perfect bull argument you might dream up. And often, the sure-fire success stories can easily reverse into underperformance.

But here’s my bullish argument. IBM is undeniably under heavy accumulation. Maybe renewed investor interest is flowing from the newly installed CEO Arvind Krishna or his $34 billion lead effort to purchase Red Hat in 2018-19 is starting to bear fruit. He has been an innovation-focused manager, building and expanding new markets for IBM in artificial intelligence, cloud, quantum computing, and blockchain. Maybe some large hedge funds are looking at the relative safety of IBM’s business in past recessions as a place to hide during the coronavirus pandemic. Maybe investors en masse are gravitating toward the company’s large dividend yield of 5.2% annualized at a price of $125. More than likely, it’s a little bit of all the above happening in combination.

Image Source: IBM Blog

IBM’s massive research & development efforts and turning focus to artificial intelligence (AI), computer learning and automated decision making could be the “killer application” that sends the company’s profit growth into overdrive this decade. The large data supercomputer project Watson has been expanding its reach for decades already. Government agencies and big business customers may provide

This article was written by

Paul Franke profile picture
Nationally ranked stock picker for 30 years. Victory Formation and Bottom Fishing Club quant-sort pioneer.....Paul Franke is a private investor and speculator with 36 years of trading experience. Mr. Franke was Editor and Publisher of the Maverick Investor® newsletter during the 1990s, widely quoted by CNBC®, Barron’s®, the Washington Post® and Investor’s Business Daily®. Paul was consistently ranked among top investment advisors nationally for stock market and commodity macro views by Timer Digest® during the 1990s. Mr. Franke was ranked #1 in the Motley Fool® CAPS stock picking contest during parts of 2008 and 2009, out of 60,000+ portfolios. Mr. Franke was Director of Research at Quantemonics Investing® from 2010-13, running several model portfolios on the Covestor.com mirror platform (including the least volatile, lowest beta, fully-invested equity portfolio on the site). As of April 2023, he was ranked in the Top 5% of bloggers by TipRanks® for stock picking performance on positions held one year. A contrarian stock picking style, along with daily algorithm analysis of fundamental and technical data have been developed into a system for finding stocks, named the “Victory Formation.” Supply/demand imbalances signaled by specific stock price and volume movements are a critical part of this formula for success. Mr. Franke suggests investors use 10% or 20% stop-loss levels on individual choices and a diversified approach of owning at least 50 well positioned favorites to achieve regular stock market outperformance. The short sale of securities in overvalued, weak momentum stocks as pair trades and hedges is also a part of the Victory Formation long/short portfolio design. "Bottom Fishing Club" articles focus on deep-value candidates or stocks experiencing a major reversal in technical momentum to the upside. "Volume Breakout Report" articles discuss positive trend changes backed by strong price and volume trading action.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in IBM over 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.

This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author's opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author's best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.

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Comments (54)

Josep Coderch profile picture
Does anyone remember the old good days of the BUNCH...? it seems IBM is pointed to the same destiny. Other than a long list of pattens there is very litle at IBM to offer...
Good lock investing in IBM...
Warning to those buying bonds or long term treasuries. I believe the tea leaves will change faster than Mr Powell thinks.
Paul Franke profile picture
I purchased shares yesterday, average cost around $120.
I believe IBM will exceed markets expectations for Q2. If this occurs with Red Hat integration upside could be significant.
@rockjcp "I believe IBM will exceed markets expectations for Q2."

Has there been any IBM Quarter since 2013 when you didn't believe this ?
@ rockjcp. At least change your screen name occasionally if you don’t want to stand out like a paid shill.
Returnofthemus profile picture
"@ rockjcp. At least change your screen name occasionally if you don’t want to stand out like a paid shill"

What you mean like pretend to be someone else, but maintain the exact same view?

Benjamin Graham Cracker profile picture
Great company valuations can't rise indefinitely, and solid companies don't tend to linger in mediocrity forever either.
Tom Armistead profile picture
After many expensive years waiting for IBM to gain traction on the opportunities before it, and which it had correctly identified, I concluded they spent too much on buybacks and dividends and too little on going big on their opportunities.

It's cheap, but I say let someone else have a turn. I'm all done with this one.
My experience with IBM wasn't that they didn't have enough cash on hand to invest. It was they didn't have the great ideas on what to invest in. (or the guts to commit to emerging technologies like mobile -- which could have impacted their other revenue streams. "The innovator's dilemma")
Paul Franke profile picture
Like I mentioned, my view of IBM has been bearish for a number of years. The new CEO is focused on pushing innovative ideas and opening markets, a big catalyst for change in the stock's direction over the next 6-12 months.
CatCameBack profile picture
The new CEO is committed to the dividend, and i am guessing he is committed to the current EPS targets, and therefore can not increase Research and Development. Which puts him into the same constraints that the previous two CEOs willingly operated under. Until IBM is willing to put a lot more money back into the business, what they have been is what they will continue to be, self under-funded.
Truth be said IBM has more than enough cash to be very flexible to acquire, pay dividends, service debt, buyback stock and invest in R&D. I support CEO' s priorities which could well change by end of year.
@rockjcp "Truth be said IBM has more than enough cash to be very flexible to acquire, pay dividends, service debt, buyback stock and invest in R&D."

If IBM wants to return to growth and increase market share, they don't have more than enough cash to do the things you mention, especially buybacks and dividends.

Focusing just on R&D expenditures, in 2019, IBM's competitors spent more on R&D than IBM's R&D plus free cash.

So, let's put IBM's R&D expenditures into perspective relative to IBM's competitors, comparing 2012 totals to 2019 totals.

It should be noted that IBM's R&D expenditures in 2012 was the highest annual total until 2019.

In contrast, the R&D expenditures for IBM's competitors has increased every year since 2012.

Below are R&D expenditures for 2012 and 2019. The numbers are from https://www.macrotrends.net/

2012 $5.82B
2019 $5.99B An increase of 2.92%

2012 $10.01B
2019 $18.00B An increase of 79.82%

2012 $4.56B
2019 $35.93B An increase of 687.94%

2012 $6.08B
2019 $26.02B An increase of 327.96%
Returnofthemus profile picture
"Below are R&D expenditures for 2012 and 2019..."

PMSL @Cringely's disciple (QQQ)

Yet IBM has topped the US patent list for the last 27-YEARS consecutively https://youtu.be/1LVD63uRac0 whilst at the same time increasing it's dividend.

The only thing that can be deduced from those figures is that these companies are either using R&D spend to offset tax liabilities or are having to spend an awful lot of money to play catch up.

Either way R&D spend is not a real measure of anything, what's the dividend yield of these overvalued stocks you've highlighted?
@Returnofthemus "Either way R&D spend is not a real measure of anything..."

How about total return of investment as a measurement?

Here's the total return performance of each since 2012 and the current value if $10K were invested back then.

IBM -6.10% $9,393

MSFT +764.32% $86,414

AMZN +1,352.75% $145,257

Here's the total return of IBM and Alphabet since the Alphabet reorg.

IBM -11.58% $8,843

GOOGL +419.51% $51,960

You can have your dividend yield and patents. I'll take a stock that performs.
CatCameBack profile picture
IBM’s obsession with its short term share price and therefore stock buybacks, and dividends, left it with little money to invest in up and coming companies. Then it has to issue debt to buy a mature company like Redhat. IBM’s competitors have a lot more cash to continue growing in the fast changing world of high tech, while IBM is wasting its cash flow on dividends and pretending like it can still operate in a cash cow mainframe era. Gerstner, Palmisano, and Rometty all made this same mistake.
Ross Healy, CFA profile picture
In your dreams.
Frankj78 profile picture
Ross, to whom are you replying?
Blockchain is rapidly emerging as 2020/21 unwinds. Red Hat integration is bringing many good things. The value and power of IBM are about to be unleashed and even with the Pandemic IBM's strengths should be more apparent with Q2 earnings.

"Blockchain is rapidly emerging as 2020/21 unwinds."

What are IBM's projected Blockchain related revenues for 2020 and over the next 5 years?

"The value and power of IBM are about to be unleashed and even with the Pandemic IBM's strengths should be more apparent with Q2 earnings."

During the Q1 Earnings presentation, the IBM CFO remarked that sales in general had noticeably slowed during the later part of March, with software in particular, due to the effects of the pandemic. As a result, IBM also withdrew its 2020 forecast.

The Red Hat CEO also recently made comments to the effect that their forecast is out the window due to the business effects of the virus and any future projections are currently unknown.

Your comment seems extremely hyperbolic in light of what IBM and Red Hat are saying, as well as, the realities of the economic impact the pandemic is having on the economy.

So, how exactly are "the value and power of IBM about to be unleashed even with the Pandemic" ? Please explain.
Returnofthemus profile picture
"So, how exactly are "the value and power of IBM about to be unleashed even with the Pandemic" ? Please explain"

@Cringely's disciple (QQQ)

It starts here https://youtu.be/3kGFBBy3Lyg
@Returnofthemus. "It starts here "

Hmmm. So an IBM Marketing PR video from Dec 2018 is your answer to how "the value and power of IBM are about to be unleashed and even with the Pandemic". OK. Good luck with that.

By the way, in addition to the CEOs of IBM and Red Hat both expecting a business decline as a result of the pandemic, that IBM major cloud outage the other day sure couldn't help.

"IBM Cloud outage downs customer websites globally"
Hudson Investments profile picture
Frankly, I never thought much of the former IBM CEO Ginny Romedy, who I compare to Carliy Fiorina for bad decisions.
Dividend aristocrat IBM, has a nice yield.
Thanks for the article, I appreciate the point of view.

I am retired, and income and capital preservation are my basic objectives. I'm a long term holder of IBM; nominally, I'm 'in' at ~$141.00. I say 'nominally', because the only reason I invested in IBM was for its dividend, and I pursued a call writing strategy vs my equity stake. Net of options expired, my basis is ~$133.00. I currently carry my position without any calls written; stock's too cheap to do that, IMHO.

I've been encouraged by the new CEO, Krishna. He plans to participate/present at each of IBM's earnings calls, a very good move. As a new CEO who seems to be positioning himself to enact change at IBM, he needs to be seen to 'own the message'. Krishna has swung the headcount axe; layoffs are always tough, but Krishna inherited a company with something like 350,000 global employees; with a nut that large, hard to imagine a CEO enacting change without realigning headcount.

In any case, I'm happy to wait and watch. I hope IBM's growth efforts take root. The basic concern I have is that IBM seems a Johnny come lately to most of the businesses it seems to want to achieve growth in, except for maybe blockchain. But I've never understood IBM's approach with blockchain; to date, it seems they've used blockchain as a loss-leader to generate consulting income. Not impressed.

Best of luck to all.
I ownEd this dog, and it is a dog, I’ll put my funds in shop, am, AMZN, MSFT, etc. and make that dividend in weeks and then some.
More risk?? Keep your risk parameters in place.
Same old song, get that 5% while you wait.
There will be a day, but it is a long time coming
80-9May peak my interest.
Best to all
Murad Shawar profile picture
I sold all those overvalued companys you speak of and bought


You know what they have in common undervalued
“the worldwide AI market grew 36% to $28 billion during 2018. IBM led all companies with a 9.2% market share, as revenue rose to $2.58 billion. For IBM, AI revenues were 19% higher than 2017....”

Is losing market share a good thing?

Change of leadership is a good thing, only hope IBM has. Can not afford to have another decade of buzzword chasing without any real traction in new markets.
@Small Fish , Yes! Makes more sense. Thanks for pointing out this out. IBM was the market leader in AI....lots of noise. But has been steadily losing share. Likewise (I believe) with Blockchain.
cplui profile picture
Aloha Paul - I'm in the IT and IT Security field, I've always respected IBM's mainframes. Question: will the declining mainframe business be offset be the fast growing Red Hat, AI and blockchain?
Paul Franke profile picture
That's the goal. The new CEO is trying to position its cloud offerings as the #1 trusted option for big business through the Red Hat deal, growing organically 15-20% per annum. I suspect total 2020 revenues will not rise much with the recession, but a recession may set the stage for stronger increases in all of IBM"s financial numbers next year. Buyers and sellers are grappling with the turnaround timing.
No. Sell while you can.

Whatever IBM touches goes to sand. I'm being polite.
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