IBM Earnings: It’s Time to Bet Bearish on Big Blue

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IBM stock - IBM Earnings: It’s Time to Bet Bearish on Big Blue

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Earlier this year, I thought I saw a spark of life in IBM (NYSE:IBM). In the fourth quarter of 2017, Big Blue ended a six-quarter string of declining revenue. But those results haven’t carried forward this year, and IBM stock is down more than 5% year-to-date. Now, facing an important third-quarter report, you have to ask yourself: do you trust IBM?

It’s easy to believe that IBM has finally turned the corner. All the financial media has talked about in the past month has been the major international deals that IBM is signing. A $500 million joint venture with Italian bank Banca Carige, a roughly $750 million with the Australian federal government, etc.

IBM is even pitching many of the same hot technology buzzword products: blockchain, cloud computing, artificial intelligence, security and so on. The problem is that, once again, IBM is about 10 years late to the developers table on all of these products. It doesn’t do any one of these services exceedingly well, but it does them “good enough for government work.”

We saw the direct results of this in IBM earnings back in April. Gross margins declined more than expected, and storage revenue (a.k.a. cloud storage) also declined. These two factors combined to plunge IBM stock nearly 16% in the weeks after it’s last report.

I expect similar results this time around as well. Right now, Wall Street is looking for earnings of $3.04 per share on revenue of $19.88 billion. IBM will also likely report an increase in revenue once again. That said, the driver for this, once again, will be due to currency translation and not IBM’s improving business.

 Because of these fundamental factors, I believe that sentiment is pretty accurate on IBM stock right now. Specifically, Thomson/First Call data indicates that 15 of the 25 analysts following IBM stock rate the shares a “hold.” In short, IBM has potential, it just isn’t doing much with that potential.

Technically speaking, IBM is vulnerable to a selloff right now. The shares have rebounded from the lower end of the trading range they have been locked in since April. IBM stock is now testing resistance near $148, and area that also happens to be home to the stock’s 200-day moving average. A reversal here could send IBM back toward it’s July lows below $138.

Finally, weekly July 27 implied volatility is pricing in a potential post earnings move of about 5.5% for IBM stock. This places the upper bound at $153, while the lower bound rests at $137.

2 Trades for IBM Stock

Put Spread: Bearish sentiment on an underperforming stock is par for the course, and IBM has shown little that would pull the stock out of its current nosedive. Don’t let the recent window dressing from the financial media fool you. Those traders siding with the bears might want to consider an August $135/$140 bear put spread.

At last check, this spread was offered 97 cents, or $97 per pair of contracts. Breakeven lies at $139.03, while a maximum profit of $4.03, or $403 per pair of contracts, is possible if IBM closes at or below $130 when August options expire.

Call Sell: If a neutral-to-bearish stance is more your trading style, then a weekly July 27 $160 call sell position might just fit the bill. Such a trade is especially useful if you already own IBM stock, as it allows you to offset some of your portfolio losses in the event of a selloff, but also allows you exposure to any upside up until the stock trades at or above $160.

At last check, this option was bid at 34 cents, or $34 per contract. A sold call allows you keep the premium as long as IBM stock closes below $160 at expiration. On the downside, if IBM rallies above $160 prior to expiration, you could be forced to provide 100 shares at IBM’s current market value for each call sold, which could be quite costly if you do not have enough IBM stock on hand to cover the call.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.


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