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Sunday, October 9, 2011

IBM evaluation

IBM's action has been nothing short of impressive. As the market collapsed IBM has seen a higher low, with 168 acting as some very strong support.

The support is best showcased within the weekly SMA chart.

The most obvious conundrum now being faced is that IBM is approaching its all-time high, with a crazy market that acts as its biggest risk to the down side.

But there are some realistic dynamics to think about concerning IBM at these levels:

1. They report earnings on 10/17. Usually IBM runs into earnings, and then 'sells-the-news'.

2. The momentum-boys are more inclined to attack a stock after an all-time high in this type of crazy market. (see AAPL)

3. Google bought a lot of patents from IBM this quarter, that very well maybe valued in the billions (especially since the patents were primarily related to search).

4. With some revenue growth being seen, IBM's multiple is expanding. This is well deserved, and if history is any guide, IBM should be trading with a trailing PE of around 16-17. (Before the 2008 financial crisis, and with stagnant revenue growth, 16-17 was their multiple. With revenue growth, it is only fair to assume IBM deserves the same multiple, if not higher.)

The multiple has been expanding slow and steady, and I strongly believe it will reach 16-17 over the next few quarters. (Maybe even 2-3 quarters out.) But at current levels, I would be hesitant entering a heavy position. Even if I was able to trade normally, I would have entered a position near 168, but would have sold off in the 180s.

With a market that stops acting crazy, IBM maybe in a position to see a new leg up that will establish a higher trailing multiple range. However, I have more uncertainty as to how IBM will trade after they report because of the above.

If IBM reports solid revenue growth (or the Google purchases skews the result that could cause the stock to pop) the multiple expansion should accelerate.

If IBM sees inline results, and the market keeps acting crappy, IBM will most likely sell off, allowing for an entry. If this causes IBM to trade relatively weaker, the strong low 170 support level maybe seen.

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