Let me get the bad news out of the way, so we get on with the good stuff. I don’t like International Business Machines (NYSE:IBM) stock from an investment perspective. They are an old dog that has not learned the new tricks like its siblings. This was my spoiler alert as to how this note is going to go.
However, I do not trade based on feelings and I favor a potential bounce in IBM stock. This, of course, would require that Wall Street doesn’t correct in the meantime.
For the next few weeks, there could be a viable bullish trade in IBM. It has recently corrected 20% off the 2021 highs. More importantly, the stock has fallen into a substantial consolidation zone. These usually attract buyers looking for bargains.
The supportive area is between $115 and $108 per share. Anything below that would bring it near its pandemic lows. Since we do not have global shutdown conditions, it would be unreasonable to expect them to return.
The conclusion then is that there is potentially more upside than downside risk from here.
Before I tell you why I don’t like it, consider that my last two write ups were bullish. Thirteen months ago I shared a similar setup and it delivered a 30% rally. I also had a similar one about a year before that. Clearly I have no issues betting “up” on a stock I don’t like.
Why I’m Not a Fan
Now here is my logic as to why I don’t like IBM stock overall. It has to do with its management that has languished for years. I have not yet seen evidence that the new regime is any different. Don’t take my opinion, just look at the facts and they speak volumes. The first comes from Wall Street, because IBM stock is 40% below its all-time highs. Compare it with its the other mega-caps who are at or just below theirs.
Other dot com survivors like Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), and Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG) are thriving. They adapted well to this new subscription business model. IBM, on the other hand, has been shrinking for years. Finally they replaced the CEO, but so far it’s looking like more of the same.
If you don’t believe me or the negative price action, then let the company’s financials be the third opinion. Revenues today are 20% smaller than 2014, and its net income is down 70%. Those are not statistics they should be proud of because they tell a shrinking story.
Furthermore, the fundamental metrics are misleading and have trapped bulls for years. IBM stock has a humble price-to-sales of 1.4. That is dirt cheap when we compare it to other mega-caps, but for a reason. This is six times cheaper than Apple (NASDAQ:AAPL) just to pick one. On the other hand, the price-to-earnings ratio is 22 and that is not cheap.
Trade IBM Stock Tactically
Therein lies a conundrum for investors. However, they should demand proof that IBM has turned the ship around before investing. Until then I could at best “trade” against a support level like these. The way to address this is through tactical positions in IBM stock for swing a trade opportunity into 2022.
If it rallies, I would book a profit quickly because there are no guarantees they will last. If it falls below $112 per share I would get out.
Even though there is support below, I don’t want to find out what lies beneath. Investor sentiment on Wall Street has soured a bit and the Nasdaq is still at all-time highs. Regardless of how strong this opportunity is, it will fail if the markets correct.
I opened my write-up today with a negative statement. I then backed it up with reasons for my bearish outlook for IBM’s business. However, I would not short the stock down here. I am merely presenting the argument against expecting brilliance.
So far management has showed us the exact opposite, therefore they do not deserve the benefit of the doubt. As the quote says, show me, don’t tell me.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.