International Business Machines Corp. (IBM) — Sticking with this week’s Trade of the Day theme of undervalued big caps, I am recommending IBM stock, which is trading at just over 10 times forward earnings.
Affectionately known as “Big Blue,” this technology giant is among the most influential companies in the space. Even though it operates in a very competitive environment it has been able to maintain a dominant position since its founding more than a century ago.
Management has squeezed profits from declining revenues thanks to cost reductions, work force realignments and a more advanced portfolio of product offerings. While earnings are expected to decline to $15.87 per share this year from $16.53 in 2014, analysts expect them to increase to $16.36 in 2016.
Capital IQ has a 12-month price target of $188 on IBM stock. And in the first quarter, Warren Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK.B) increased its position by 3.4% to 79.6 million shares.
Technically, IBM stock is in a bullish consolidation called a saucer that began in October. This reliable pattern is often seen in blue chips and results from an institutional plan of accumulation over a relatively long period of time.
A break above the resistance line and 50-day moving average at $170 would confirm a new uptrend. Note the three buy signals from my proprietary indicator, the Collins-Bollinger Reversal (CBR). Support rests at the most recent CBR buy at $163.37.
Buy IBM stock at the market in anticipation of a break above its 50-day moving average for a trading target of $175. Long-term investors should buy shares with a goal of 15% appreciation and a dividend yield of more than 3% for a total annualized return of 18%-plus.
