Going Contrarian on Tech Stocks: IBM

It is the start of a brand new week and as usual, today offers us the opportunity to chart the options trading course for the rest of the week. We will start our options trading activity this week with contrarian moves on technology stocks. Enter International Business Machines Corp. (NYSE:IBM), an information technology (IT) company with a valuation of $184.68B.

IBM offers a wide range of services, including cloud consulting, business continuity services and various software packages through its five reporting segments. IBM is an ancient landmark it its industry and its huge market capitalization affords it the position of the 16th largest publicly traded company in America.

You should also note that IBM is in a wonderful position to reward income hunters because of its impressive dividend history. The company has increased dividend for 19 straight years, the last dividend increase in May was by an impressive 16% and the company has returned $138B to shareholders in dividends and share buybacks over the last 13 years.

Nonetheless, all of the aforementioned facts hold little importance for growth, momentum and value hunters who are interested in how fast the share price is moving upwards. In the paragraphs below, we will explore why more people will sell shares of IBM (leading to drop in share price) in the coming months and how options traders can position themselves with put options.

Reasons IBM is Hugging the Bear

  • Unimpressive Financials

The most recent event in the news that holds much importance to traders of IBM is its Q1 2014 results, which turned to be anything but impressive. Actually, IBM reported  earnings of $2.54 per share to meet analysts’ estimates and the company has reiterated its earnings outlook of $18.00 in 2014.Gross margin expanded by 90 basis points from the same quarter last year and 500 basis point from the previous quarter.

Nonetheless, even the most cursory look at the financials show that the company is not in the best of positions. For instance, the first quarter reported revenue of $22.48B was down 18.8% sequentially and 3.9% from the year ago quarter. Net profit margin declined 35.83%, Operating margin declined 32.29%, Return on average assets declined 42.8% and Return on average equity declined 38.67%.

  • Restructuring is Another Name for Cost-Cutting

IBM has been working hard to regenerate itself as it seeks a leaner, more efficient and manageable structure. On the plus side, the company divested its low-margin hardware and customer care businesses and the company is working towards an $8B in productivity savings. However, the fact that IBM reported high profit on lower revenue (as expressed in the financials) shows that the company is probably cutting costs to keep profit levels steady.

Interestingly, cost cutting cannot continue indefinitely and the company will have to face the reality of its situation eventually. Its either the company continues to cut costs at the expense of product quality or it continues to cut costs at the expenses of innovation, research and development.

How to Trade IBM Options

Shares of IBM have dropped 5% in the last one month and the share price has fluctuated by almost 20% at different times in the last one year. I recommend IBM put options and I am definitely getting into position with the IBM Jan 2015 180.000 put (IBM150117P00180000) at its asking price of $9.50.

— Daily Option Alerts

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