IBM: Yes, I've Heard of It

• 30-some years ago, IBM looked to be a good buy as it made a new all-time low of $10.16. 
• This month, the stock has posted a new all-time high of $217.90.
• The recent move has created mixed views of IBM, with some believing the stock to be overvalued. 

Early Monday morning, Barchart’s Chart of the Day popped up in my emails. The subject line of the message read, “IBM – Ever Hear of It?”. As if caught up in an H.G. Wells time machine, I was immediately transported back more than 30 years. There I was, sitting at my desk in the middle of the local cooperative, still a relatively young Series 3 commodity broker. (It’s amazing how many of the words in that sentence no longer apply.) It was early morning, and a customer came in for a cup of bad free coffee. (Yes, I often made the first round of coffee for the office in the morning. It wasn’t good.) After taking a seat next to my desk he asked, “What’s your best call today?” It was south-central Kansas, so the answer to that question would usually be something in the grains or livestock markets, but not this day. I took a look at the quote screen (no, not on a computer, but a television screen hooked up to a market feed) and said, “IBM” (IBM). 

I don’t recall exactly what month this was, but I’m thinking it was during the washout seen in 1993 when the stock was priced between $10 and $12. Back then, IBM was one of THE key blue-chip stocks in the Dow Jones Industrial Average, and it had taken a beating. From the stocks high (at the time) of $43.97 (August 1987) through its low of $10.16 (August 1993), IBM had lost 77% of its stock value. A couple things came to mind that day (it must’ve been early September 1993):

• Fundamentally, being one of the major blue-chip stocks, IBM wasn’t likely to go to $0 meaning there was limited risk in buying it
• Technically, the stock completed a bullish spike reversal during August 1993 as the settlement price that month was $11.44, up $0.31 from July. 

As mid to late 1990s played out, IBM eventually climbed to a high of $139.19 during July 1999. I often wondered if that customer had acted on my call and bought the stock. I hope so. 

Back in the present, Barchart’s Chart of the Day talked about a number of fundamental and technical factors behind IBM’s recent run to a new all-time high of $217.90 this month. Despite the strong uptrend, or most likely because of the bullish technical picture, the emailed mentioned “some analysts see IBM as overvalued, with MorningStar rating it 1-star and noting it is 54% overvalued”. Additionally, analysts “have mixed opinions: 5 strong buys, 2 buys, 10 holds, and 4 sells, with price targets ranging from $139 to $240” (Really pinning this one down, right?). 

What would I say if a customer came into my office today (Monday, September 16, 2024)? First, it would be a bit awkward given my office these days is the basement of my house. Second, rather than the stock being near its all-time low it is now near its all-time high (IBM closed last Friday at $214.79). And third, we have to consider more than fundamental and technical analysis these days, with the third school being the study of algorithms (something that didn’t exist 30-some years ago).

• Fundamentally, the argument for IBM being overpriced includes a P/E (price to earnings) of 20.79. However, using P/E as a guide to over or undervalued is as outdated as using old hand-filled paper charts in technical analysis (what I was using 30-odd years ago).
• Speaking of which, when it comes to technical analysis have to keep two things in mind: 
  • Newsom’s Market Rule #1: Don’t get crossways with the trend (price direction over time). 
  • Because of Newton’s First Law of Motion applied to markets: A trending market will stay in that trend until acted upon by an outside force.
    • With that outside force usually investment (these days algorithm driven) activity
• The study of algorithm activity is complicated, as each program can be coded using a different combination of market factors.
  • I reached out to an algorithm I’m familiar with and learned its read on IBM is “long hold”. This fits with my classic technical analysis of an uptrend that could be getting top-heavy. 
    • Based on my long-term analysis, a sell stop would be placed below the previous 4-month low of $162.62, fully acknowledging that is a long way down. 

Back to the original question, yes, I’ve heard of IBM having spent most of my career as an analyst tracking it due to that one morning so long ago. What makes the company more interesting is that the stoic, old computer company has stayed relevant despite the meteoric changes seen in the electronic information industry over the past three decades. How many others have come and gone during that same time frame? 

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On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.