Company Background

International Business Machines Corporation (IBM) is an American multinational technology giant headquartered in Armonk, New York, with operations in over 170 countries. The company began in 1911, founded in Endicott, New York, as the Computing-Tabulating-Recording Company (CTR) and was renamed “International Business Machines” in 1924. IBM is incorporated in New York and is one of the household technology names not only in the US but also worldwide.

International Business Machines Corporation provides integrated solutions and services worldwide. Its Cloud & Cognitive Software segment offers software for vertical and domain-specific solutions in health, financial services, supply chain, and asset management, weather, and security software and services application areas, customer information control system and storage, analytics and integration software solutions to support client mission critical on-premise workloads in banking, airline, and retail industries.

Its operations span across producing and selling computer hardware, middleware and software, and also providing hosting and consulting services in areas ranging from mainframe computers to nanotechnology. The company believes that the application of intelligence, reason and science can improve business, society and the human condition.

Current position – Financial performance & Future growth prospects

With the fast changing technology landscape in recent years, IBM has had to find a way to adapt to the needs of its clients and the broader industry in order to stay relevant. We have seen a complete reinvention of the company in the last few years as the senior management has been able to identify the need for things like cloud storage and computing as well as data processing platforms. Thus, International Business Machines Corporation has gradually evolved as a provider of cloud and data platforms.

The 2019 Red Hat acquisition, was completed in order to allow IBM to strengthen its competitive position in the hybrid cloud market. With Red Hat buyout, the company offers Linux operating system — Red Hat Enterprise Linux — and hybrid cloud platform — Red Hat OpenShift — that aids enterprises with digital transformation.

In addition to that, IBM provides advanced information technology solutions, computer systems, quantum computing and super computing solutions, enterprise software, storage systems and microelectronics. All of these areas are poised for remarkable growth in the years to come. Last but not least, IBM is planning on spinning off its slow-growing infrastructure services business, which will make the company leaner and will allow IBM to return to more consistent and meaningful growth numbers.

We believe that IBM is well positioned for consistent growth in the long run as it also holds the highest number of patent wins among all of its competitors. IBM is a true powerhouse when it comes to research, development and innovation and the number of patents that it has to its name is the ultimate confirmation for its technical expertise. In 2020, the company maintained the lead spot for the 28th year, with 9,130 patents.

IBM has done a lot of work in recent years to defend its name as a hallmark technology company in this volatile and fast-paced tech environment. IBM now stands out with a better business mix, continuously improving operating leverage through productivity gains and increased investment in growth opportunities. Another distinctive characteristic of IBM has been the company’s approach towards its research and development (R&D) initiatives set it apart from its peers. As a company that has quite a lot of catching up to do with some of its main competitors like AMD, NVIDIA, Amazon Web Services, GOOGLE Cloud, IBM knows that the size of its R&D budget will determine to a large extent how quickly and efficiently that gap could be filled. On an annual basis, the company invests around 7-8% on R&D for maximizing all of the high growth and high-value opportunities.

You have to also keep in mind that the stock is considered to be a turnaround play, which means that after years of declining revenues and compressing margins, the company has finally found a way to revitalize its business by tapping into huge and high-growth markets like AI and cloud computing. Turnaround plays could be indeed very risky and time-sensitive investments as investors cannot be certain as to whether or not the company will be able to stage that turnaround at all. In many cases inexperienced investors end up holding on to stocks that keep falling in price, failing to realize that buying a stock just because the shares are trading at a large discount to historical prices or relative to its peers is not a guarantee for locking in a good trade.

The company’s cloud transformation seems to be on the right track as IBM has seen a consistent double-digit YoY cloud revenue growth in recent years. The most recent Q1, 2021 Earnings report confirmed that the company is moving in the right direction as IBM reported its first year-over-year revenue growth since 2019. Despite coming in at the modest 1% YoY growth rate, it shows that the senior management decision to focus on the hybrid cloud solutions as their core business segment was indeed the right one. Another testament to that was the fact that the company’s cloud computing businesses were responsible for $6.5 billion of the quarter’s $17.7 billion in revenue.

However, there has been a very strong contrast between the new fast-growing cloud business of IBM and its legacy hardware sales business. When looking at the actual numbers it becomes even more obvious as while IBM’s cloud sales saw year-over-year growth during the last five quarters, Global Technology Services experienced revenue declines over the same period. The Global Technology Services segment is currently the largest company segment representing over 36% of Q1 revenues. Thus, a sluggish growth or no-growth at all in that segment affects negatively the performance of the whole company. This is the reason why IBM has decided to spin off its managed infrastructure services, which reside under Global Technology Services, into its own publicly traded company called Kyndryl. The spinoff is expected to in the second half of 2021. The new IBM will be a much leaner and growth-oriented company, which will definitely be a positive long-term catalyst for the stock.

Dow Theory 2.0 – Correlation Confirmation

Dow Experts’ approach has always been based on identifying the next great movement in the market by analyzing both the fundamentals and technicals as well as other all-important factors that have an impact on the price. Furthermore, our cross-correlation analysis allows us to act in the market only if the movement on the chart is confirmed by the other key ETFs and indices that we use in our investing philosophy.

As you know, the Dow Theory 2.0 includes more than 30 correlations between different ETFs and stock market indices, which give us a chance to confirm whether a certain movement in the market is worth taking action for.

Therefore, in order to determine whether IBM is a good stock to buy with respect to the current levels of the price we have decided to analyze the performance of both the SPY (Select Sector SPDR S&P 500 ETF Trust) and the XLK (Technology Select Sector SPDR Fund). The two ETFs share a very strong and positive 90% 10-year correlation, which would allow us to confirm some of the signals that we are getting with a great deal of certainty. The SPY is the largest, most liquid and most commonly traded ETF out there that invests in the 500 most well-capitalized companies in the US, and by doing so it mimics the performance of the S&P 500 benchmark index. The XLK on the other hand has been one of the most exciting, attractive and high-growing ETFs out there as it is heavily concentrated on the Large-cap tech names and also has few names in the financial payment or telecom space. Its limited selection universe excludes small-caps and most midcaps. Avoiding smaller, less-stable firms results in lower volatility and a tilt toward value compared to our broad tech-industry benchmark index, and can cause other minor performance differences. XLK held the title for a long time as the cheapest and the largest fund in its segment.

IBM is part of the XLK Technology ETF, and it currently holds the 15th spot on the list with a 1.40% weighing. IBM is also part of the broad SPY ETF as it currently holds the 66th spot on that list with a 0.37% weighing. Thanks to the strong 90% positive correlation between the two ETFs, we would get a strong confirmation as to what is the most likely the way forward for IBM’s stock. Furthermore, IBM’s stock has a 61% positive 10-year correlation to the XLK. This means that a signal on the SPY chart, has a 90% chance of occurring on the XLK chart, which if it materializes would mean that the chance of that same pattern occurring in IBM’s price chart would be over 61%. By applying our cross-sector correlation matrix we significantly increase the probability of success of our analyses.

By looking at the daily chart, one could see very similar movements on the SPY, XLK and the IBM charts from throughout the last 6-8 weeks. Due to the coronavirus outbreak back in 2020, the SPY made a 35% correction, dropping from its highs at $339 towards the key support at $221 where it found lots of buying interest, which ultimately led to one of the strongest rebounds in the history of the stock market as the SPY has appreciated with 62% in 5 months and 91% in 14 months. There has been a lot of speculation and discussion recently as to whether or not the market has entered into a post COVID bubble of inflated asset prices. However, as we know the technical charts usually reflect the overall fundamental picture and the investors’ sentiment in the market. At the moment, the remarkable and relentless fiscal and monetary support provided by the government and the Fed is acting as a safe net for this highly overbought and overvalued market. The support will continue, but how much longer could the market continue to grow in this environment. We believe that the first major correction will take place as soon as the Federal Reserve mentions the word “tapering” with respect to its quantitative easing program. We all know that the monetary policy of the future will be tighter than the monetary policy of today, it’s just that no one knows exactly when the Fed will announce that it is planning on initiating the tapering process. The most recent NFP report came in significantly below economists’ expectations, which means that the Fed will not see any further pressure of raising rates in the coming month.

The XLK has also experienced a major recovery after setting the COVID-19 related lows in March, 2020. The ETF bottomed around the $70 mark last year and hasn’t looked back ever since. Throughout 2021 so far, the XLK has continued to move steadily higher, despite the sideways price action in the period February-March. What we observed in early April was quite interesting as we got a strong breakout on the SPY daily chart that occurred on April 1st, which was then followed by the XLK’s upward breakout from the $125-135 price range that the ETF was then trading within. The follow-through movement on the XLK came on the same day when the SPY broke out and there was no delay on that front. However, we saw the SPY upward movement weakening in the second part of April as it was forming a short-term exhaustion and topping pattern. The interesting thing this time around was that the XLK ended up breaking down lower around 10 days prior to the broader SPY decline.

Well, why is that important you might ask.. because we might be looking at the same scenario playing out at the moment. The SPY’s daily chart is showing a clear upward breakout from the ascending triangle formation, while the XLK is still trading within its ascending triangle and has just rebounded from the upward sloping diagonal support. We believe that the XLK will be moving higher in the coming sessions, and that a potential upward break of the horizontal resistance at $144 is highly likely (90% probability). This will open up the doors for the XLK to push higher towards the $155-165 area.

Lastly, we should also point out that even though that IBM has a much larger weight representation in the XLK ETF, the stock has seen an absolutely identical price action to the SPY on the daily chart throughout the last 6-8 weeks. What’s more important even is that IBM’s stock has already broken above its ascending triangle resistance, which is another great signal for both IBM’s stock as well as the whole Technology sector.

We have to also point out that the recent major global pandemic, has shown individuals, companies and governments how truly important technology is not only for our businesses but also for our everyday lives. This favorable social image combined with the relatively high returns have also improved the overall investment interest in the space. We are currently living in the 4th Industrial Revolution, which is characterized by the digitization of everything and the introduction of things like AI, IoT, 5G,Cloud computing etc. Technology companies like IBM that are sitting on the front lines of this revolution are poised to benefit greatly from the favorable business trends that these fast-growing industries offer.

In conclusion, the Dow Theory 2.0 confirms that there is a lot of bullish momentum in the market at the moment. Furthermore, it is clear that IBM is one of the very few Technology companies that is trading at a favorable valuation, paying a great 4.56% dividend yield and also offers a great long-term growth after the business restructuring is completed in the 2nd half of the year. The triple cross-correlation that we applied between the SPY, XLK and IBM showed us clearly that all three of them are headed higher. Thus, we are strongly bullish on IBM not only in the coming weeks, but also in the long run as we believe that the company is very well positioned to produce remarkable stock gains for its investors as a result of the improving and growing business volumes, clients and products around the company.


Technical Analysis – IBM

By looking at the daily chart, we can see the relatively positive price action that has been in place in the last 15 months taking the price from the March 23rd lows of around $85 to the $148 highs in the beginning of June, 2021. This represents an outstanding 74% gain for the stock in a year and a half. However, the road to the above-mentioned all-time highs was not easy as it was filled with many different hurdles that the bulls had to overcome in order to keep pushing the price higher. In fact, after rebounding from the COVID-19 related lows, the stock was stuck in the $100-128 sideways price channel for exactly 1 year. Throughout that time we saw multiple rejections at both the top and bottom end of that range. However, the stock finally managed to break out above the $128 resistance in early April, 2021. Since then the stock has managed to quickly recover back to its pre-COVID highs at around $148 per share. Thanks to IBM’s cloud and AI oriented business strategy the stock has reignited investors’ interest in the stock as it remains one of the household technology brands. This in turn has turned the stock into a go-to choice for both small retail and large institutional growth-at-a-reasonable-price (GARP) oriented investors looking to add some technology exposure without paying the crazy high multiples of some of the other names in the industry.

The stock is currently sitting at $148 per share, which is rather close to its the all-time highs at $158, which by the way were set all the way back in 2013. Now, we usually do not like chasing stocks that are sitting at or near their all-time highs, but IBM’s story is different. We see that the stock has continued to find a lot of buying interest around the upward sloping diagonal trendline support, which currently lies at the $143 mark. Furthermore, the contracted and rather narrow Bollinger Band channel that we are seeing on the Daily chart is signaling that a major breakout should be expected soon. The stock finished the 1st week of June in a very positive manner touching the upper bollinger band with a good-sized green candlestick, showing the presence of bullish interest at these levels. Also, we are seeing the 50 DMA and the 100 DMA sloping higher and providing a dynamic and upward trending support for the bulls. This is a tremendous opportunity for Long-term investors to come in and open up their Long positions with an extremely favorable risk-reward ratio. The technical test of the above-mentioned support zone coincided perfectly with IBM’s Q1 Earnings report announcement, where we saw the company beating the consensus estimates in a decisive manner. This was a very powerful combination of bullish indications that ended up pushing the stock sharply higher through the rest of May. However, we believe that the most important thing for IBM from a technical perspective will be occurring on the daily chart in the next few trading sessions as the stock is getting ready to break its pre-COVID highs. A clear breakout above the $150 region would show that there is a lot of upside potential in the stock.

As you know and as we have mentioned many times before, panicking has never made anyone any money, nor has over-excitement. While we understand that IBM’s price action is strongly bullish we would advise investors to wait for a clear breakout above the $150 resistance, before committing fully to the stock. What’s really interesting is that despite the recent price appreciation of IBM, if you look at the future growth, earnings and revenue expectations the stock is actually cheap and undervalued even at the $148 highs that it is trading at the moment, as it holds a Forward P/E of only 13.57.

Investors should see the recent price action as a confirmation for the successful turnaround story and long-term growth story that IBM offers. In our view this is definitely an opportunity that every growth oriented investor should look at, because we truly believe that IBM’s significance and importance as a cloud computing provider and advanced information technology solutions developer will only continue to grow in the coming years. Could the stock go lower? Of course it could.. any stock could go lower, but that is not the point. As a growth-oriented investor you have to be ready to take on some pain (stock price declines) from time to time when you are chasing after the high double-digit annual growth. Basically, this is the price you have to pay for owning these names. However, with the proper risk-management and portfolio positioning, this short-term speed bump could prove to be a phenomenal opportunity for generating outstanding profits in the months ahead.

Furthermore, we believe that the new $1.9 trillion stimulus package accepted in the US, will inject a lot of liquidity into the market, which will be a great short-term positive for the equity market. We expect most of the big tech names as well as other market favorites like IBM to restore their favorable image among traders and investors in the coming weeks, thus we anticipate that the XLK, XLV, XLE will be some of the best performing US sector ETFs in June. However, it is important to note that the loose monetary policy with artificially low interest rates and constant money printing is a net negative for the US dollar in the short term. Thus, we are also bullish on Emerging markets, in the next 2-4 months as most of the emerging market economies have US dollar denominated debts. If the US dollar continues to weaken that would make it easier for some of these emerging economies to repay their debts. Why is that important for IBM? Well, this trend might lead to a pick up in the international sales segment for the company as the company’s products would become cheaper on a relative currency basis. However, as we continue to see the US economy recovering and we move pass the global pandemic the Federal reserve will be forced to raise the benchmark interest rates in the US, which will end up boosting the dollar and could result in an Emerging market debt crisis in 6-12 months.

We believe that the stock market in the US currently holds a lot of intrinsic risks – COVID-19 mutations and resurgence of new cases, Biden’s struggle to pass on the funding bills that he promised that he will deliver, the state and pace of the economic recovery, the post-Brexit economic reality for the UK and EU, as well as the serious pick up in commodity and real estate inflation in the US. These factors might lead to a sideways and choppy price action in the coming months. However, our analysis shows that the winners would most likely continue to win in the stock market.

IBM, has definitely been a winner in terms of stock price appreciation throughout the last 12 months, but it is also a fact that the stock has under-performed most of the thus we are strongly bullish on MRNA’s stock in both the short and long term. Additionally, we are seeing IBM as a great way of playing the AI and Cloud computing boom that is currently happening without having to pay any crazy P/E multiples.

The most price action should be treated as a great confirmation signal for buying this strong performing stock and holding it for the long-term. Moreover, some of the technical indicators that we are monitoring closely on a daily basis (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are clearly supporting the recent upward movement and are pointing to a further price appreciation. In addition to that, it is important to note the fact that the XLK and the Technology sector as a whole would continue to attract a lot of the investors’ attention moving forward, as people are now much more conscious about the fact that regardless of what is happening in the world, they could keep their jobs and continue to work remotely thanks to the advanced technology systems of today. Let’s not forget that consumers are sitting on record levels of savings and are eager to spend, and staying up to date with the latest tech developments and products would definitely be an area that people would be continuously willing to spend. This makes us optimistic for the future performance of IBM as a meaningful part of the XLK ETF structure. Our analysis shows that as a result of the great leadership by the senior management of the company, the business restructuring and the phenomenal fundamental positioning of IBM with the largest number of secured patents, the stock will be able to hold its ground better than some of the other stocks in that sector in the event of a correction, and it would also significantly outperform the broader market in an uptrend environment.

Acknowledging the fact that the stock is currently trading at its 52-week highs, we would like to point out that buying at these levels would be suitable more for risk-oriented and that more risk-averse investors, should wait for the stock to clearly break above the $150 before committing fully to the stock. Thus, we are currently looking at the $140-150 range as a great accumulation zone for the stock. Our take profit levels in the coming months are going to be $175 and $190 respectively.

Sincerely,

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