IBM: Maybe I Should Take Up Technical Analysis
Last month I wrote about IBM (IBM - Annual Report) and said:
IBM is now trading at a P/E of 12.7x 2008 earnings, compared to a five-year average P/E of nearly 18x. It offers a free cash flow yield of nearly 7% at a time when 5-year Treasuries are yielding 2.8%.Expected long-term earnings growth of 11% annually marks a modest slowdown from the 13% generated over the last five years. It is also well below the sustainable growth rate of 29%, which is further evidence of excess cash flow that can be used for more share repurchases.
Valuation aside, things seem a little dicey here. The new guidance seemed sufficient to spark a better rally than we got. If IBM can’t move when estimates are jacked up by $0.25, what will make it move?
I can’t claim to be expert in technical analysis, but a look at the charts, especially the moving averages, suggests that $109 may be a make-or-break price point for many investors. In today’s market environment, I think I’d rather keep my powder dry than chase a possibly elusive extra four percentage points of upside.
But I’ll be watching. I also might be tempted to find some approach using options. For example, the March $110 call options would provide upside in the event of a strong rally, and could largely be paid for by writing $100 puts. Since I think the valuation is reasonable, being forced to buy at $5 lower wouldn’t hurt my feelings too badly, and I’d still get the exposure to the additional upside if the stock does rally.
$109 did prove to be a make-or-break area, and the effectively zero-cost call option I proposed would be worth almost $6 as of Tuesday’s close. Maybe I should take up technical analysis.
Or maybe I shouldn’t. Given the way some of my fundamental picks (where I do consider myself an expert) are working lately I may be better off sticking with the naive approach.
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