Everyone is Selling This Blue Chip, but I Say 'Buy'
Big Blue is in the red.
IBM's (IBM) after-the-bell earnings release Wednesday actually saw the company beating expectations on the bottom line, but it was the top line that put a hurt on the shares Thursday. They closed down 6.4% as traders reacted negatively to a 4% decline in third-quarter revenue year over year.
The world's largest computer services firm, Dow component and tech bellwether reported revenue of just $23.7 billion, and while that may seem like a lot, the number was about a billion dollars below the consensus estimate. The revenue decline also represents the sixth straight quarter of falling sales, as well as the third straight quarter of lower-than-expected revenue.
Thursday's decline was the worst one-day showing for IBM shares since April, when the company saw a drop of more than 8% in one session in response to its weak Q1 earnings.
So far this year, IBM shares are down 10%, and that makes Big Blue the worst-performing stock in the Dow Jones Industrial Average year to date.
Predictably, the ever-cautious and usually late-to-the-party Wall Street analyst class moved to distance themselves from the IBM miss. On Thursday, UBS (UBS) downgraded shares from "buy" to "neutral," citing the aforementioned missed revenue. The firm also raised questions about earnings power.
Credit Suisse analysts weighed in, writing in a research note that, "Our confidence in the quality of this road map remains low…the issues facing the company could be more than temporary."
That "road map" refers to IBM's increased focus on its higher-margin software and services business in the face of sagging computer hardware sales.
Unfortunately for IBM, even its biggest growth regions -- China and emerging markets -- saw revenue declines.
"IBM has been challenged with changing the model on the hardware front, and now the growth markets are a surprise drop," said Chris Ambrose, an analyst with Gartner. Ambrose said he thinks the higher-margin software strategy is a good one, but he also said the company needs to see revenue growth to prove that strategy sound.
Now, in the face of all of these negatives, who in their right mind would want to buy IBM shares here? Well, I say if you're a contrarian trader looking for value in the bluest of beaten-up blue chips, then IBM is exactly where you should place some of your risk capital.
First, I don't see the shares slumping much more off current levels. The stock now trades near a two-year low, and I suspect this represents a short-term trading floor for the shares.
Second, when a high-profile, widely held stock gets beaten up, it often acts like a dry sponge. Any drop of water will make a dry sponge expand. In other words, any drop of good news will likely cause IBM shares to expand.
That good news could come in the form of enhanced global economic growth, and in particular, an increase in China's GDP. Or, the good news could come via the fast money realizing that there is value in Big Blue shares at these tarnished levels.
Of course, the real good news will be if IBM can engineer a Q4 earnings beat when it reports results again in January. If that happens, intrepid investors who buy the shares today could be staring at a very nice double-digit percentage gain over the next several months.
If you are the contrarian type, then IBM is definitely a stock to consider buying today.
Recommended Trade Setup:
-- Buy IBM at the market price
-- Set stop-loss at $161.90, approximately 7% below recent prices
-- Set initial price target at $196.70 for a potential 13% gain by the end of January
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