(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Shares of International Business Machines Corporation (IBM) have fallen by about 14% from its highs in early January. The stock has recently rebounded by over 5.6% from its lows in late June and may be set to rise by about 7%. That would make the stock's total gain from the lows nearly 13%.
The company is expected to report results on Wednesday, July 18 after the close of trading. Analysts are looking for the company to post earnings of $3.04 per share, growth of about 2% versus last year. Revenue is expected to have risen to $19.86 billion, an increase of about 3%. Revenue for the trailing 12 months has declined by over 25% since peaking at the start of 2012. (For more, see also: IBM: Still Looking for Signs of Growth.)
The long straddle options strategy is implying that IBM's stock rises or falls by about 6% from the $145 strike price by expiration on August 17. It places the stock in a trading range of roughly $137 to $153. The number of calls outweighs the puts at the $145 strike price suggesting more bets are being placed on the stock rising. The calls exceed the puts by a ratio of almost 2 to 1, with roughly 3,300 open call contracts.
But some traders have been increasing their bets the stock will rise by roughly 7% to $155.60. That is because the open interest for the $155 calls has been steadily growing in recent weeks, currently around 5,000 contracts. The cost to buy one contract is about $0.60. (For more, see also: IBM's Stock Poised to Fall Amid Bullish Forecasts.)
The technical chart still looks weak, with the stock struggling to break out above a multi-month downtrend that has been in place since the stock peaked at the start of January. Volume levels have tapered off in recent weeks, an indication that buyers may lack conviction.
The business outlook for the balance of the year still looks bleak with revenue expected to be flat versus last year, while earnings are forecast to climb by about 2%. Meanwhile, profits are supposed to be flat in 2019, while revenue is seen rising by about 2%.
The growth outlook, although an improvement from previous years, still has a long way to go for any short-term rebound to turn into something longer term.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.