An Opportunity in Big Blue IBM? 

Many perceive International Business Machines (IBM) as the poor cousin of highly innovative Apple (AAPL) and Microsoft (MSFT), being dull, plain, and going no-where on the technology front. But what few realise is that IBM has been quietly transforming itself into the market leader in big data and digital services.

IBM has been the long standing leader and is the world’s largest provider of corporate IT services, providing a vast array of services around data storage, management, security and analytics.

Big Blue’s primary advantage is its size and market positon where their brand reliability is entrenched in the bulk of all fortune 500 companies.

An example of this is over 80% of Fortune 500 companies currently use IBM cloud services and 24 of the top 25 Fortune 500 is supported by IBM’s software as a service offering. To say IBM doesn’t dominate its chosen space is an understatement.

Whereas in the past, mainframe hardware and so called super computers were IBM’s strengths, they have now focused their growth towards data and analytics services, a $200 Billion growing industry.

An opportunity exists today to purchase stock of the world largest IT services company IBM.

The following is what makes me want to add IBM to my long-term portfolio over the coming week. I already hold some IBM. Here I will get straight to the point, as I believe it makes for efficient decision-making.

Please note, I am both a long-term deep value investor as well as a medium-term trader who utilizes the combination of both fundamental and technical analysis to form a view of every investment I make. Doing so I believe leads to low risk and superior market beating returns over the long run.

Fundamental Factors;

The Bad

Forecasted temporary weak Earnings per Share growth (EPS)

The Good

Valuation of $160-$170 (approx.) based on adjusted discounted cash flow analysis, so IBM is undervalued at current prices.

Ongoing buyback of undervalued stock which is a great sign.

Earnings per share (EPS) have been good for the past 5 years.

Return on Equity (ROE) of over 20% is more than satisfactory.

Although Net Debt to Equity (D/E) looks high, this is primarily due to vendor financing held on its books for hardware and services it provides.

Long-term cash flow relative to reported profits is strong.

And long term funding surplus.

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Technical Factors;

The Bad

Clearly broken the $140 and $145 key price support levels.

Currently below both 50 and 200 day moving averages.

Seems to follow a confirmed down trend line.

The Good

The stock is oversold on a variety of momentum indicators, primarily driven by lower earnings growth expectations and recent SEC probe.

It is likely that value seeking fund managers like myself are coming in to take advantage of these depressed prices.

Other Factors

For longer-term investments, I generally like to see who else is on-board with me and where the smart money has found its home.

In my opinion, actions always speak louder than words.

In this case, SEC filings report the following world-renowned deep value investors holding significant stakes in Intel.

Prem Watsa –                    16.26% of portfolio managed
Warren Buffett –              11.82% of portfolio managed
Robert Bruce –                  7.68% of portfolio managed
Conclusion

IBM is currently undervalued and temporarily out of favour but it is a fundamentally strong company with monopolistic characteristics and smart money support, including Warren Buffett who is the single largest shareholder with over $11 Billion in stock, and IBM representing his 3rd largest listed shareholding behind Wells Fargo and Coca Cola.

I will be personally adding more IBM into our long-term portfolio over the coming week once there is confirmation of fund manager buying volume picking up.

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Disclaimer

Effective Trading Solutions Pty Ltd t/as theFreedomTrader.com is a Corporate Authorised Representative (CAR No. 1267698) and Terry Tran is an Authorised Representative (AR No. 1267697) of Australian Financial Advisory Group Pty Ltd (AFSL No. 475300).

Any information or advice contained on or disseminated through this website is general only in nature and does not constitute personal or investment advice.

You should seek independent financial advice prior to acquiring or disposing of any financial product. All securities, financial products or instruments carry risks. Past performance is not indicative of future results.

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