OK, this may seem like we’re stepping in front of a freight train with this earnings trade, but hear us out: We’re going to bet against Big Blue. That’s right, we’re daring to recommend a put option on International Business Machines Corp. (NYSE: IBM), a stock that has shot through the proverbial roof.
How strong is this stock? Well, since late August, the shares are up 14%, a huge move for a slow grower. In fact, the stock has suffered just six down days in the past six weeks. And it hasn’t closed a day below its 10-day moving average since Aug. 31. Oh yeah, it also hit an all-time high on Wednesday.
So why on earth would we want to mess with this raging bull? Well, earnings are coming up next week — Monday after the close, to be specific. And the simple fact is that IBM hasn’t fared too well after recent earnings reports.
It isn’t that IBM doesn’t do well compared to analysts’ estimates. Quite the contrary, in fact. The last time the company fell short of an EPS forecast was in April 2005.
The problem is that the shares run up into earnings, only to fall after the report. In the one to two weeks before the past four reports, the shares have enjoyed rallies averaging 5.5%. But the shares then fell on the day after each report by an average of 3%. Looks like a classic case of “buy the rumor, sell the news.”
Adding to our caution about IBM are the following: The whisper number is higher than the consensus analyst estimate; 77% of covering analysts rate the stock a “buy”; short interest is tame; and call volume is swamping put volume among November options.
All of this tells us that expectations are high for IBM, and it will need a blowout report to keep the uptrend intact. Need we remind you that Intel Corporation (NASDAQ: INTC) had a solid earnings report this week that apparently wasn’t solid enough to give its shares a boost.
We’re not recommending a put on IBM without some trepidation. The stock’s chart is enough to give one pause. But a look at IBM’s recent post-earnings performance gives us the guts to recommend the IBM Nov 140 Puts.
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