IBM may have Bottomed at $117/share

posted Mar 4, 2016, 8:33 PM by Intelligent Investor   [ updated Mar 10, 2016, 6:39 PM ]
IBM stock may have bottomed at $117/share a few weeks ago, the stock is now trading at around $135/share. IBM was just upgraded by Morgan Stanley from a Hold to a Buy on February 18, 2016. Even if the upgrade was weak, it represents confidence in the company by a major investment firm.

Another reason is that, during an interview on CNBC, Warren Buffett indicated confidence in the company by saying that he doesn't think the company is losing value and "IBM could be worth more money (in a few years)".

So we have 2 big names over the last few weeks exhuming confidence in the company, we may see more in the near future. However, for investors that want the stock to go up immediately after they buy, it would be best to wait for IBM's revenue to stop bleeding. Wait for their earnings announcement and see if IBM's revenue has stayed flat or gone up.

Looking at My Financial Analysis on IBM below,

In the Price Comparison, IBM's Relative Value is $502.59/share. At it's current stock price of $136.30/share, this represents a Relative Gain of 268.74%.

IBM Price Comparison

Also looking at the Summary of Growth Analysis, a price of $136.30/share represents a calculated 10 Year Annual Rate of 21.97%. Whenever the price of IBM shares go down, the 10 Year Annual Rate goes up. So at this point it would be in our best interest if IBM's share price goes down so that we could get a higher 10 Year Annual Rate.

IBM Summary of Growth Analysis

If you take a look at the Rule-of-Thumb Valuations, IBM's stock at $136.30/ share gives us an Equity Bond Theory of 9.99% rate, whereas the 10 Yr Municipal Bond Rate only gives us 3.40%. When you compare these two rates, IBM stock at $136.30/share is the better deal. In addition, the company's True Price/Book value is at 0.79. That means that for every $1 dollar the company's assets are worth, you are only paying $0.79 cents for them. This is like buying a house for $790,000 knowing that there is $1,000,000 million dollars worth of assets hidden in its walls. The True Price/Book value is calculated as Market Capitalization divided by Total Equity (Shareholders' Equity) plus the Treasury Stock.

True Price/Book = Market Capitalization/(Total Equity + Treasury Stock)

Another thing to look at is IBM's Current P/E ratio is at 10.01 which means at $136.30/share, this stock is cheap. As a rule-of-thumb, a stock is cheap when the P/E ratio is less than 15.

IBM Rule-of-Thumb Valuations

When you scroll all the way to the right and look at the Analysis of Financial Statements, the calculations show that IBM has a good chance of surviving its current shortfalls and problems.

On the Technical Analysis side, using the ThinkOrSwim Platform from TDAmeritrade, we see that the Market Sentiment oscillator is heading higher while the price is heading lower. This could mean that sentiment about IBM is changing to the positive side. Also looking at the Forecast Oscillator, there is clustering on February 18, 2016, when IBM hit its 52 week low of $117/share.

IBM Market Sentiment and Forecast Oscillator
Source: ThinkOrSwim by TDAmeritrade

Looking at the 200-Day Bollinger Bands, IBM was below the Lower Band (Red Line) when it hit its 52-week low of $117/share while the MACD Oscillator is rising. It also looks like the price is heading higher to breach the 200-Day Moving Average (Blue Line). The MACD Oscillator also crossed the zero line as the price heads higher. There is also initially a spike in Volume followed by above average Volume the following weeks which could indicate a climax in IBM's sell off.

IBM Technical Analysis
Source: ThinkOrSwim by TDAmeritrade

In summary, I am using a combination of the following events to determine a bottom:
  • 2 big names - Morgan Stanley and Warren Buffett publicly exhumed confidence in IBM
  • My Financial Analysis show that IBM has value
  • The Analysis of Financial Statements show IBM can weather the storm they are in
  • The Technical Analysis show Market sentiment is changing and the sell off in IBM could be reaching a climax.
Thus, IBM may have bottomed out at a 52-week low of $117/share. However, I could be wrong, if their earnings announcement on April 18, 2016 disappoints investors, then we could be in for more selling. At this point, if IBM bottomed out, I could only wish for IBM's stock price to fall further so that I could buy more shares at $117/share. If the sell off in IBM is reaching a climax, I could only wish for IBM to hit a lower 52-week low, much lower than $117/share.

Disclosure: I own IBM shares and plan to purchase more if the price drops.