Did Warren Buffett Put IBM On The Clock?

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I am a market enthusiast and part-time trader. I started writing for Seeking Alpha in 2011, and it has been a tremendous opportunity and learning experience. I have been interested in the markets since elementary school, and hope to pursue a career in the investment management industry. I have been active in the markets for several years, and am primarily focused on long/short equities. I hold a Bachelor of Science Degree from Lehigh University, where I double majored in Finance and Accounting, with a minor in History. My major track focused on Investments and Financial Analysis. While at Lehigh, I was the Head Portfolio Manager of the Investment Management Group, a student group that manages three portfolios, one long/short and two long only. I have had two internships, one a summer internship at a large bank, and another helping to manage the Lehigh University Endowment for nearly a year.


Disclaimer: Bill reminds investors to always do their own due diligence on any investment, and to consult their own financial adviser or representative when necessary. Any material provided is intended as general information only, and should not be considered or relied upon as a formal investment recommendation.

Summary

  • Oracle of Omaha admits IBM could turn out to be a mistake.
  • Dividend gives Warren time to wait for strategy to play out.
  • One must wonder if stance will change should results continue to weaken.

On Monday, Warren Buffett spoke at length with CNBC. He made some very interesting comments about IBM (IBM), a name I've been quite bearish on in recent quarters. While the Oracle of Omaha did not call his investment in IBM a mistake today, he acknowledged the holding could turn out to be quite wrong.

Buffett still believes his IBM purchase was the right one, and he believes that the stock will eventually be worth more. At the moment, he's getting paid to wait, with a $5.20 annual dividend that's expected to be raised at some point this year. Unfortunately for Warren, his annual report showed a $2.6 billion loss on IBM at the end of 2015. Despite IBM shares rallying from their recent lows, that loss has actually grown a little so far in 2016.

Obviously, Buffett has to put a positive spin on things. Should he admit a mistake on IBM, shares would probably lose a couple of bucks right away. With about 80 million shares of IBM, additional losses in the hundreds of millions would be incurred. Having that large of a position in the stock does put Buffett in a pickle with average daily volume in IBM only being about 5.3 million shares.

Most believe it would be rather difficult for Warren to sell out of his entire position without anyone noticing, and if word leaked he was selling, shares would likely head lower. Interestingly enough, Buffett stated that "Charlie is neutral" on IBM. With shares falling to multi-year lows in the past month or so, some might have thought Warren would be buying more, but the news here was that he was not selling any shares of IBM.

IBM is going through a transitional period, and recent results have been quite poor. While you can blame currencies for a chunk of this weakness, management hasn't been able to control costs very well. After initially hoping for $20 in adjusted EPS during 2015, the company didn't even hit $15, and that number is forecast to fall to $13.50 this year. Analysts currently call for some EPS improvement next year, but revenues are forecast to continue their decline.

I like to think of "what-if" scenarios, so I'm wondering what Warren would think of IBM if results continue to weaken over the next few quarters and shares plummet further towards $100. The recent rally from the $116.90 low did help with his "positive spin" comments on Monday. I don't think he could have put on as much of a positive face today if shares were near their lows. However, I have to believe that by saying IBM could be a mistake, Warren is telling IBM management that they are on the clock. If results don't improve in the near term, don't be surprised if Warren does what he says he has done before, accept his mistake and take a big loss.

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.

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.

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