IBM's Stock May Rise 7% Short Term

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Unlike many large cap stocks, International Business Machines Corp. (IBM) has failed to recover from its losses earlier this year, its shares still down more than 12% off their January highs. That may be changing. Technical analysis suggests that IBM is breaking out and may recoup some of those losses, rising by as much as 7%. Options trades are also suggesting the stock rises by the start of early next year.

IBM's revenue has fallen a staggering 26% after peaking at $107 billion in 2011. But investors may be growing more bullish as the company continues to move forward with growth initiatives, including the use of blockchain technology. (See also: Alibaba and IBM Ranked First When it Comes to Blockchain Patents.)

IBM data by YCharts

Bullish Technical Charts

Technical charts show IBM breaking out of a pattern known as a wedge. Shares may continue to rise toward technical resistance of $159, an increase of about 7% from its current price. Should the stock reach resistance, it would also refill a technical gap created when the shares plunged in late April, falling from $161 to $149.

The relative strength index also has been trending higher since late June, a sign that bullish momentum is coming into the stock.

Bullish Bets

Options trades also are betting the stock will rise by the start of early next year. The number of bullish calls at the $150 strike price outnumbers the bearish puts by about 2 to 1, with 7,000 open call contracts. A buyer of the calls would need the stock to rise by almost 5% to $155 to break even if holding options until expiration. (See also: IBM Traders See Stock Plunging 20%.)

Pricey Stock

Fundamental Chart data by YCharts

This optimism doesn't mean IBM is poised to rise longterm. The stock is currently trading at a 2019 price to earnings ratio of about 10.6. That places the stock in the middle of its historical range since 2015. That earnings multiple may even look a bit high considering that analysts are forecasting earnings will climb by 1.5% in 2019. Even worse, those estimates are more than 2% lower than the beginning of the year. 

So while IBM investors may be heartened by the prospect of short-term gains, the stock's longterm outlook remains more problematic.

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.