The Market’s Latest Beating Has Brought Out the Best in IBM Stock

IBM stock - The Market’s Latest Beating Has Brought Out the Best in IBM Stock

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The sudden market collapse that struck midweek negatively affected almost everyone. But few companies saw their hopes dashed like International Business Machines (NYSE:IBM). After a forgettable first half of the year, IBM stock delivered some promising momentum in the second half. However, the markets had other ideas.

On Wednesday, when the Dow Jones Industrial Average lost nearly 832 points, the IBM stock price lost 3% of its value. On the following day, shares gave up 2.6%. For the year-to-date, the iconic technology firm is down more than 7%, with further pain not out of the question.

While other companies have suffered steeper declines on paper, including sexier competitors like Microsoft (NASDAQ:MSFT) and especially Amazon (NASDAQ:AMZN), the problem for IBM stock is future viability, or lack thereof. Shareholders have patiently awaited a robust recovery, but to little avail.

Thanks to the midweek massacre, the IBM stock price dropped underneath the $140 level. That means shares haven’t moved much since late 2010. Worse yet, the company has only gained roughly 22% since the beginning of this century.

Tech investors who are frequently used to dramatic gains are obviously unimpressed. You can honestly get fair better returns simply through buying a basket of strong S&P 500 stocks. Even companies with legacy businesses like HP (NYSE:HPQ) have demonstrated significant momentum in recent years.

Given this context, it’s no surprise that IBM stock hasn’t captured the Street’s attention. Most covering analysts rank shares as a “hold,” and that apathy probably won’t change anytime soon.

However, an intrepid few remain optimistic. UBS analyst John Roy reiterated his “buy” rating, and sees the IBM stock price hitting $180. He’s joined by research firm Stifel, which is also bullish on “Big Blue.” Are they right, or should investors leave this dead horse alone?

IBM Stock Just Became More Compelling in the Fallout

Understandably, most investors are likely looking to pounce on the popular names like Amazon during this market fallout. I’m not necessarily against this strategy. However, I’d take a good look at IBM stock. Under current circumstances, its bull case got more interesting.

For one thing, the company pays a handsome dividend. As it stands right now, the yield is 4.5%. This isn’t a time for investors to ignore this payout. While your killer instincts might compel you to a knife-catching exercise, who knows how long this correction will last?

No one catalyst exists for the market fallout. Most finance experts cite rising interest rates. Undoubtedly, that’s a significant component. However, we also have a deeply fractured political environment. No matter what happens in the upcoming midterm elections, we’re going to suffer a contentious government.

When you add in the ongoing China tariffs, it quickly becomes apparent that we’re facing unusually troubling conditions. IBM stock and its consistent history of returned capital provides peace of mind.

Moreover, dividend stocks like Big Blue tend to perform better than their high-beta growth counterparts. Part of the reason is the leadership team’s motivations. Passive income generating companies want to keep shareholders happy over the long term, and thus don’t rock the boat unnecessarily.

This suitably describes IBM stock. Management is focused on steady revenue growth, which they have achieved as they shed leverage toward legacy businesses. In addition, the company keeps debt levels under control, and its cash flow robust year-to-year.

Overall, the iconic firm has successfully navigated many storms. For instance, in 2008, the IBM stock price gave up almost 40% from peak to trough. However, shares quickly stormed back to pre-crisis levels just one year later. More recently, the company cratered in early 2016 before rapidly climbing back up.

Big Blue Is More Than Just a Dividend Play

IBM’s history of resilience will eventually attract astute buyers. But right now, the prevailing attitude is that the company is a flailing institution, struggling to remain relevant.

That’s not entirely accurate. While its revenues have declined since earlier this decade, the losses have substantially decelerated. Plus, lucrative divisions, such as the cloud and cognitive solutions make up a greater share of total revenue. And this year, Big Blue is on pace to exceed 2016 and 2017 sales.

Finally, prospective buyers shouldn’t overlook the company’s efforts in the international arena. IBM has secured multi-million dollar cloud-solutions contracts with the Australian government and Italy’s Banca Carige. These efforts could help produce a positive surprise for the tech firm’s upcoming third-quarter earnings report.

Granted, IBM stock isn’t a perfect opportunity. But when the markets are in panic mode, this is exactly what your portfolio needs.

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

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