Why IBM Attracts Value Investors
That is the title of an article posted on CNNMoney.com in the last few weeks. Well, obviously no one can predict the future but I believe there is a better way of doing so than the author of this article. First off, let me say that IBM is indeed a great company. Investing has nothing to do with being great or investing in great companies in my estimation. Valero, which I highlighted a few days ago, was also a great company well before 2003. Yet, its stock had languished for years. Since 2003, the stock is up about 1,200%. Is it a better company than it was just a few years ago? Not hardly. You get my point yet you may disagree. That's a topic for another post which I will address at some time.
It is not often you will find one of the largest companies in the world being "mispriced", as CNNMoney would have you believe, without a reason. Every morning all financial managers, advisors and mutual fund managers wake up and see IBM across their screen. At $90+ billion dollars in sales, they have every opportunity to think of and buy IBM. Yet, the compression of its valuation and its underperformance for six years have not improved at all.
Yet, CNNMoney lays out a compelling reason IBM is a "value" play. Low PE, services growth, expected growth higher than the S&P 500 and on and on and on. Or should I say blah, blah, blah and more blah. Well, I guess it has to be a value play because its performance cannot be classified under any other category. I find this repeated group think on Wall Street as hilarious. When a darling falls out of favor, it must be a value stock. To a certain extent, this is also true of Dell which I wrote of yesterday. Yet, there are long cycle behavioral reasons why I would potentially be more bullish on Dell. Without writing a thesis I will keep it to one topic. It is outsourcing. Should we enter a significantly difficult economic environment, I believe outsourcing will lose its vigor as the public becomes more vocal in its economic standing. This leaves IBM very exposed to its major source of revenue and profit. Additionally, IBM is betting very, very big that offshoring is a long term trend with the hiring of 50,000 programmers in India and a major shift of much of its global software strategy to India. While betting on global growth over time is a good strategy, this particular bet was a major mistake the last time we had similar economic circumstances in the 1970s. During a similar period of malaise and international competition, the long term outcome was a major shift to reinvestment in America by not just US companies but international companies. There are many more reasons but that's too much typing. In both of these situations, this would be revenue neutral to revenue positive for Dell.
Back to IBM's stock. The stock is significantly underperforming and shows no signs of improving. I am quite confident, although not clairvoyant, IBM is headed for a retest of its cycle low of approximately $50. That's another 33% haircut from here and about 65% off of its 2000 high. So, six years after 2000, we are looking at an investment that is likely headed south. There are things about longer term patterns on IBM which lead me to believe IBM could actually drop to the mid $40s or mid $20s. Before you fall out of your chair, IBM was in the mid $20s just ten years ago. Given cyclical patterns, this behavior has actually repeated before in modern history so you do not need to be a doom and gloomer to believe it is possible.
So, remember, value is best defined by Benjamin Graham's parameters or something which does not stray too far from his ideals. Value is not defined by a low PE and a paltry dividend in a market which already has amongst the lowest dividend yields in the last one hundred years. Below is a buying pressure chart for IBM over the last twelve years. Does this look like something you want to own?
It is not often you will find one of the largest companies in the world being "mispriced", as CNNMoney would have you believe, without a reason. Every morning all financial managers, advisors and mutual fund managers wake up and see IBM across their screen. At $90+ billion dollars in sales, they have every opportunity to think of and buy IBM. Yet, the compression of its valuation and its underperformance for six years have not improved at all.
Yet, CNNMoney lays out a compelling reason IBM is a "value" play. Low PE, services growth, expected growth higher than the S&P 500 and on and on and on. Or should I say blah, blah, blah and more blah. Well, I guess it has to be a value play because its performance cannot be classified under any other category. I find this repeated group think on Wall Street as hilarious. When a darling falls out of favor, it must be a value stock. To a certain extent, this is also true of Dell which I wrote of yesterday. Yet, there are long cycle behavioral reasons why I would potentially be more bullish on Dell. Without writing a thesis I will keep it to one topic. It is outsourcing. Should we enter a significantly difficult economic environment, I believe outsourcing will lose its vigor as the public becomes more vocal in its economic standing. This leaves IBM very exposed to its major source of revenue and profit. Additionally, IBM is betting very, very big that offshoring is a long term trend with the hiring of 50,000 programmers in India and a major shift of much of its global software strategy to India. While betting on global growth over time is a good strategy, this particular bet was a major mistake the last time we had similar economic circumstances in the 1970s. During a similar period of malaise and international competition, the long term outcome was a major shift to reinvestment in America by not just US companies but international companies. There are many more reasons but that's too much typing. In both of these situations, this would be revenue neutral to revenue positive for Dell.
Back to IBM's stock. The stock is significantly underperforming and shows no signs of improving. I am quite confident, although not clairvoyant, IBM is headed for a retest of its cycle low of approximately $50. That's another 33% haircut from here and about 65% off of its 2000 high. So, six years after 2000, we are looking at an investment that is likely headed south. There are things about longer term patterns on IBM which lead me to believe IBM could actually drop to the mid $40s or mid $20s. Before you fall out of your chair, IBM was in the mid $20s just ten years ago. Given cyclical patterns, this behavior has actually repeated before in modern history so you do not need to be a doom and gloomer to believe it is possible.
So, remember, value is best defined by Benjamin Graham's parameters or something which does not stray too far from his ideals. Value is not defined by a low PE and a paltry dividend in a market which already has amongst the lowest dividend yields in the last one hundred years. Below is a buying pressure chart for IBM over the last twelve years. Does this look like something you want to own?
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