Stock of the Week


May 1st 2018

NYSE Symbol: IBM
Sector: tech
Price as of 5/1: $144.96  


The first quarter is in the books and the major averages are slightly in the red. The white hot tech sector has cooled off. Facebook and blow out earnings from Google did little to help the sector. Investors should turn their attention to the underperforming sectors like Energy. Energy has been the worst performing sector 4 out of the last 6 years, yet the price of oil is up 50% in the last two years at a three year high.  We highlighted the energy sector and four stocks two months ago. Chevron and Halliburton are up 9% since being featured, Phillips 66 is up 20% while Geopark is up 45%. Besides the energy sector a number of great value dividend stocks have been left behind as everyone chased the tech sector. A number of stocks have dividend yields around 5% or better including AT&T, Verizon, Ford, Altria, Philip Morris, Dominion Energy, Southern Company, Pitney Bowes and many others. There are a number of growth and income ideas with yields in the 3% range particularly in the healthcare and drug space. Merck, Pfizer, Bristol Myers, and Eli Lilly average 3.22% in dividend yields.

This week, we'll feature one of those blue chip value stocks with an attractive dividend yield. The stock of the week is IBM. IBM has been in a seven year trading range from as high as $200 to as low as $120, but earnings keep improving every year and revenue will growth for the first time in 22 quarters or 5.5 years. IBM's sales finally grew thanks to their technology service and cloud platform divisions along with other initiatives like block chain and security and encryption. Cloud revenues grew 27% last year. Going forward, these faster growing divisions should generate more than 50% of total revenue surpassing the old IBM mainframe business which generates a lot of cash, but no growth. When investors realize IBM is no longer an older mainframe business, the stock may get a better multiple. 

The competition remains tough for IBM, but with a stock trading for 10 times earnings, 1.6 times sales, free cash flow of $12 billion and a dividend yield of 4.3% with an ex-dividend date of May 9th,   , I would say most of the bad news has been priced in and it won't take much good news to bump the stock 10% to 20% higher.