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Warren Buffett says this stock makes him feel good

Talking Numbers

One of the largest positions in Warren Buffett's Berkshire Hathaway's portfolio is IBM.

Buffett began buying shares of Big Blue three years ago. While that hasn't been a losing investment, those dollars could have gotten higher returns in the overall market. Since March 2011, IBM is up 12.6%. However, the benchmark S&P 500 index is up 38.5% during the same time period. What's more, shares in IBM lost 9% in the past twelve months while the market gained 21%.

Nonetheless, Buffett remains optimistic about the stock. In an interview with CNBC's Becky Quick on Monday morning, the Oracle of Omaha said of IBM:

"The revenue trends have been less than anticipated – although not dramatically less than anticipated. The financial performance has been pretty good but it's been helped by low tax rates and things of those sort. There is a transition going on in the business, particularly in terms of the cloud. It's fair to say that I know less about the future of IBM than I might know about the future of Wells Fargo or Coca-Cola or the [other] businesses we own. I think I do know enough it to still feel good about owning the stock."

However, Pat Dorsey, Chief Investment Strategist at Sanibel Captiva Investment Advisers, is in no rush to buy shares in IBM even with Buffett's endorsement of the company and its low price-to-earnings multiple compared to the rest of the market.

"It's cheap at 9 times earnings," says Dorsey on CNBC's Street Sign's Talking Numbers segment. "But, unfortunately, the operating results are what you would call a 'flat double triple'. Revenues have been flat over the past decade. They've not grown at all for 10 years. But, operating income has grown by about double and earnings have tripled because of buybacks."

Dorsey likens IBM's share buyback to a leverage buyout of the company. However, he is skeptical of IBM's ability to keep growing earnings through cost-cutting.

"If you believe it can keep cutting costs forever, you should own it," says Dorsey. "But, unfortunately, that top line is not going anywhere anytime soon."

Jeff Tomasulo, Managing Partner at Belpointe, believes there may be a silver lining in IBM's stock chart.
"Maybe it's Warren Buffett," says Tomasulo. "Or, maybe it is IBM buying the stock. But, over the last five months, you can see that it's put in a triple bottom."

(See: CNBC's Warren Buffett Watch)

Tomasulo is looking at $172 per share as a key support level since that's roughly where each one of the bottoms turned around. "If it breaks below $172," he says, "I would be very concerned that the price action would bring it lower. If it holds above that $172, I want to see it break above $190 and I think you'll be pretty set going forward for at least a year or two."

To see the full discussion on IBM with Dorsey on the fundamentals and Tomasulo on the technicals, watch the video above.

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