(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
International Business Machines Corp. (IBM) could be set to fall nearly 20% based on trading in the options market and an analysis of the stocks current trading patterns. Shares of the stock sit at a critical technical support level, while options traders are betting shares of the stock fall by January of next year.
Investors have been patiently waiting for IBM to turn its business around after years of declining revenue. However, according to analysts revenue and earnings estimates, that turn around will not only be slow but it is also nearly non-existent. It makes that cheap earnings multiple of almost 10.5 times to 2019 earnings estimates of $14.22 per share. (For more, see also: IBM: Still Looking for Signs of Growth.)
Bearish Options Bets
The January 18, 2019 long straddle options strategy suggests that IBM stock could rise or fall by about 16.7% from the $145 strike price. It places shares of IBM in a trading range of $121 to $169. But the number of puts outweighs the calls with 3,600 put contracts of open interest, versus only 2,670 call contracts. Additionally, there are nearly 4,400 put contracts of open interest at that $135 strike, and with a cost per contracts of approximately $7.20, it suggests that the price of the stock would need to fall to below $128 just to break even.
Technical Breakdown Nears
IBM shares are also sitting on a critical technical trading level and uptrend that dates back to early 2016. Should the stock fall below support around $147.50, the stock may fall all the way to $121, before hitting the next significant support level, a decline of nearly 19% from its current price around $149.25. (For related reading, see also: IBM's Turnaround Story Hits a Dead End.)
Return to Growth?
After years of declining revenues, analysts are forecasting revenue to just barely grow by less than 1% per year in 2019 and 2020. But the earnings outlook isn't much better, with a growth rate of about 2.7% in 2019 and 3.7% in 2020. It makes the appearance of IBM's cheap one-year forward earnings multiple of 10.5 not all that cheap.
IBM Revenue (TTM) data by YCharts
But should IBM's stock hold its uptrend, or report better than expected quarterly results in the middle of April, the stock would likely avoid the sharp decline. It could also spur option bets to be unwound and repositioned. It makes the upcoming quarterly results for IBM critical.
For now, IBM's stock appears to be nearing a breakdown, with options traders, technical charts and analyst estimates suggesting shares fall in the coming weeks and months.
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.