Will IBM Stock Outperform?

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With shares of International Business Machines (NYSE:IBM) trading around $198, is IBM an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

IBM is an information technology company. The company operates in five segments: Global Technology Services, Global Business Services, Software, Systems and Technology, and Global Financing. Technology products and services are in high demand worldwide, as consumers want to be up-to-speed, and companies always need the latest and greatest to stay ahead of the competition. Cloud computing has been hot in recent times, which has not been too good for IBM. Should the company want to hold on to its market share, it needs to make moves quickly, and provide the technology products and services that worldwide consumers and companies demand.

IBM reported earnings that topped analyst expectations. The company made a profit for the second quarter, which beat the mean analyst estimate compiled by Bloomberg. The company increased its profit by working to shift focus to the fast-growing areas of cloud computing and data analysis.

T = Technicals on the Stock Chart are Mixed

IBM stock has struggled to see significant progress this year. The stock is currently breaking higher after a positive earnings report. Analyzing the price trend and its strength can be done using key simple moving averages.

What are the key moving averages? They are the 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, IBM is trading slight below its rising averages, which signal neutral price action in the near-term.

IBM

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of IBM options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

IBM Options

17.20%

0%

0%

What does this mean? This means that investors or traders are buying a very minimal amount of call and put options contracts, compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Flat

Average

September Options

Flat

Average

As of today, there is average demand from call buyers or sellers, and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very minimal amount of call and put option contracts, and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates, and what this means for IBM’s stock.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. The last four quarterly earnings announcement reactions can also help gauge investor sentiment on IBM’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for IBM look like, and more importantly, how did the markets like these numbers?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

11.40%

3.45%

11.15%

4.39%

Revenue Growth (Y-O-Y)

-3.33%

-5.11%

-0.64%

-5.39%

Earnings Reaction

1.92%*

-8.27%

4.40%

-4.91%

IBM has seen increasing earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about IBM’s recent earnings announcements.

* As of this writing

P = Weak Relative Performance Versus Peers and Sector

How has IBM stock done relative to its peers, HP (NYSE:HPQ), Dell (NASDAQ:DELL), Microsoft (NASDAQ:MSFT), and the overall sector?

IBM

HP

Dell

Microsoft

Sector

Year-to-Date Return

3.58%

84%

29.93%

32.80%

25.87%

IBM has been a poor relative performer, year-to-date.

Conclusion

IBM is a global technology company that provides widely-adopted  products and services to companies and consumers. Recently, the company issued a positive earnings report for the last quarter. The stock has not made much progress this year, but is now seeing a post-earnings pop. Over the last four quarters, earnings have been decreasing, while revenue figures have been increasing, which has produced mixed feelings among investors. Relative to its peers and sector, IBM has been a weak year-to-date performer. WAIT AND SEE what IBM does in coming weeks.

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