IBM STOCK "STUCK IN THE MIDDLE WITH YOU"

IBM Corp.

stock is currently planted in the middle of “no-man's land” right in between identifiable technical support and resistance on the price chart. The stock seems to be holding up fairly well in the midst of the recent market turbulence. However, it also failed to break out above resistance when the market conditions were friendly to equities. We outlined exactly what needed to happen for one side or the other to win the battle between the bulls and the bears in IBM's arena the last time we covered the stock on September 17th: “Now, IBM is facing resistance at the $193.85 - $194.13 level (the highs from August 27th) with the ultimate test coming at the $196.40 level from July 28th. If the bears are to have any hope of winning in the intermediate-term, they will need to make sure IBM does not close above that July 28th peak. If they can manage to hold their ground at the $196.40 resistance, technicians say the downside targets for the stock would come in at $179.50 and $173.04.” Since that report, IBM traded north of the $193.85 - $194.13 initial resistance, but failed to eclipse the key $196.40 level. Now at $186.91, the stock is trading below both the 200-day and 400-day moving averages, but it has not been trading any more bearish than any other tech stock over the last couple of weeks. So, does IBM have “the goods” to make a charge upward through key resistance or will the relative lack of revenue and earnings growth send shareholders running for the hills? What the bulls see in IBM… • Strong net profit margins in excess of 17% • Strong positive levered free cash flow of $9.34 billion • Short-term balance sheet strength as evidenced by the current ratio of 1.14 • A reasonable valuation for the stock: o A price-to-earnings ratio of just under 10 based on next year's consensus estimates – which is fairly attractive as compared to expected EPS growth of 10.7% o A price-to-sales ratio of 1.90 o An enterprise value of $223.46 billion that easily trumps the market capitalization of $186.46 billion • An attractive 2.3% dividend yield What the bears see in IBM… • A heavy overall debt burden as evidenced by the debt-to-equity ratio of 265.35% • A very high price-to-book ratio of 10.75 • Expectations for anemic, barely-positive revenue growth of 0.2% • A stock struggling to display any relative strength versus the broader market The technical take on the stock… Technicians note that IBM shares must either break out above the $196.40 resistance level or break down below $179.50 for either the bulls or the bears to be able to declare victory. Anything in between is subject to the randomness and short-term directional changes of the market. The projected target for IBM below $179.50 would come in at approximately $173. The projected upside target for the stock if $196.40 is eclipsed will be $199 - $201. Overall… It looks like the play here for traders is to be looking to buy near the $179.50 support level and to be selling IBM as it approaches $196.40. This stock – more than many that we have studied recently – appears to be a “channel stock” where you can fade moves to the upper or lower edge of a defined trading channel until those borders are violated on a closing basis.