Tuesday, October 3, 2017

My Magic Heat Map Says: IBM Shares Ripe For Buying

The "Heat Map", which I've implemented as part of my stock watchlist system, identifies stocks that are cheap or expensive based on their 52-week trading range. I call it a Heat Map because stocks with lots of red indicate stocks that are likely expensive or in high demand vs. green bar which indicates stocks that are not so hot, but are trading cheap.


The heat map reminds me of my early days as an engineer (about 22 years ago), when I used Shmooing Graphs to characterize and test computer memory chips.

In semiconductor manufacturing or testing, Shmooing graphs are used to identify margin of stability (guard bands) between the two logical states (on/off) of a transistor based on other parameters such as voltage which is swept from high-to-low or low-to-high to help determine margins between the two states and overall stability of the device.

In the case of stock price, I'm using Shmooing concept to identify margins of safety between two extreme price points while using 50% point as the demarcation line between Buy/Sell states.

Green bar indicates the stock price distance from its 52-week low and proximity to Buy state.
Red bar indicates the stock price distance from its 52-week high. and proximity to Sell/Expensive state.

As the stock price gets near its 52-week low range, it gets cheaper in price and there is more margin of safety when compared to the 50% point. This is shown with a longer green bar next to the stock ticker.

When a stock gets expensive and trading at or near 52-week high, it gets a longer red bar and a shorter green bar, indicating the stock is in high demand and is trading at a premium price.

IBM falls under the top five cheap stocks as indicated by my Heat Map and therefore is a good candidate for further research.

Further Research

If there is one reason to buy IBM, I think it's the "Blockchain"

According to research firm Juniper Research, IBM far outranks Microsoft as blockchain industry leader. This was evident by the fact that more than 40 percent of tech executives ranked IBM as top blockchain provider and only 20 percent said the same of competitor Microsoft.

Blockchain is the technology behind cryptocurrencies such as Bitcoin. However, its use is not just limited to cryptocurrencies, instead it is considered as one of the most important technologies of the future that will allow distributed management and tracking of everything from bank transactions to tracing food movements and controlling access to sensitive data such as personal identity information.

How IBM benefits from blockchain?

Blockchain's market size is expected to grow rapidly in the near future with many companies trying to take advantage of the trend. The technology can be a single most important and fundamental innovation of our time that can help secure and manage other innovations of the future such as AI (Artificial Intelligence) and Autonomous cars.

IBM is one of the first companies to start considering the technology for commercial applications, will profit from the blockchain technology significantly.

Below are some of the areas where IBM's Blockchain technology is making headway:

Tracking Food Contamination

IBM recently announced partnerships with Nestle, Uniliver, Wal-Mart, Kroger, Tyson Foods, McCormick, and several other food giants to help them automatically trace food movements and tackle contamination faster by using the blockchain technology.

Securing Identity Sharing Solutions

SecureKey Technologies, a digital identity and attribute sharing network, is testing a consumer digital identity network built on top of the IBM blockchain technology with banks in Canada. If successful, it can revolutionize how personal identity data of the customers are shared during financial transactions and could greatly reduce or even eliminate the theft of customer's confidential data.

SecureKey is discussing a blockchain based identity network built in partnership with Canadian banks BMO, CIBC, Desjardins, RBC, Scotiabank and TD Bank.

Tracking Carbon Credits

A Beijing-based Energy-Blockchain Labs Limited announced what it described as the "worlds first blockchain-based green assets trading platform" is deployed using IBM Blockchain technology.

Protecting Electronic Health Records

IBM's Watson Health artificial intelligence unit has signed a two-year joint development agreement with the U.S. Food and Drug Administration (FDA) to explore using blockchain technology to securely share patient data for medical research and other purposes.

These are just few of the many areas where blockchain can be used to enhance security and provide access control of sensitive data while providing immutable traceability of physical assets. It could very well be the next best thing since the invention of Internet.

Having reviewed importance of blockchain technology, let's look at the IBM stock valuation and dividend to determine whether it is a good long-term investment at the current price.

IBM Stock Valuation

2018 Fair Value Estimates

FastGraphs Fair Value Estimate based on 26 Analysts: $208.79


FastGraphs Fair Value Estimate based on 5-Yr Normal P/E: $158.69


MorningStar IBM stock Fair Value Estimate: $158


Most analysts are estimating higher fair value at $208.79vs. the 5-Year Normal P/E multiple or MorningStar fair value estimate of $158.

This simply means that analysts are bullish in determining their fair value estimates based on future cash flows and earnings estimates.

I'm going to take the average of the above three estimates to come to a reasonable fair value for my IBM stock buying price target: Average Fair Value of $175.16

The average fair value gives me a nice discount of approx 19% based on IBM's current stock price of $146.77.

IBM Dividend Quality


IBM has a current yield of 4.09%, which is significantly higher than its 5 year average dividend yield of 2.70%. It is one of the few blue chip tech companies with a dividend above 4%.

IBM also has a 110 years of paying dividends with 13 years of consecutive dividend increase.

Dividend Growth

1-Yr DGR: 7.1%
3-Yr DGR: 12.3%
5-Yr DGR:  12.7%

Dividend Payout Ratios

2016 Earnings Payout Ratio: 40%
2016 FCF Payout Ratio: 41%

Overall, dividend looks well covered by both earnings and free-cash-flow and nicely growing at high single digit.

Potential Risks

IBM has been in the midst of a long turnaround with 21 quarters of declining revenues. It is a big ship to turn, but the good news is that it is turning, though rather slowly.

The market has not been happy with the slow turnaround and has punished the stock considerably by slashing it nearly 20% from its 2016 highs of around $180/share price.

The stock is also showing signs of turnaround; however, there are still downwards risks.


The historical long-term bottom for IBM's P/E is around a multiple of 8.4, as indicated by the pink line on the chart above. There has been only two instances in the past 20 years when the stock traded at such low multiples, one during the 2009 recession and the other during January 2016 market correction (the two circles on the chart).

IBM's stock is currently trading at a P/E of around 10.6 which is about 20% higher than the historical bottom. This is a good indication of stock starting to turn around and potentially a good place to start a position.

Conclusion

I believe there is still some downward pressure on the stock and will likely remain so till the company can show growing sales. However, there are signs that the company is turning around due to progress it is making in the areas of AI and Blockchain technologies.

I'm long-term bullish on IBM and believe it will be a major player in Blockchain, Cloud, and AI technologies and the stock would greatly benefit from the growth in these future technology areas.

At a current yield of 4+%, I see IBM stock as a great long-term value with an excellent dividend and price growth prospects.

Disclosure: I currently own shares in IBM stock and will likely add more shares on the dips.

Disclaimer: Author of this article is not a licensed/registered financial or investment adviser and does not provide investment advice. Any mention of stock names/tickers in this article or website is not a recommendation to buy or sell. Please do your own due diligence before buying any stocks. This article is for informational and entertainment purposes only. Full disclaimer can be read here: Full Disclaimer

15 comments:

  1. Excellent analysis Mr. ATM, thanks for sharing. As you I also initiated a position last month.

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    1. Thanks Mr. Robot, good move as you probably got a better price than I did when I started my position yesterday. Stock price seems to be in an upward momentum which is a good time to buy.

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  2. Big fan of the graphs and visualization kick you are on right now. I made a similar chart last week for my watch list to check valuation by how they ranked from their 52 week low percent. Had not though about IBM in terms of Blockchain, that is a good point. Still don't know if it is right for me at this time though. Still love the analysis.

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    1. Thanks DD, yes graphs and visualization are very useful and helps me see what I'm doing with my investments.

      I look at blockchain as analogous to TCP/IP protocol without which internet cannot exist. As data and online security becomes more and more critical, blockchain will become the essential ingredient for online transactions and distributed network/asset management.

      MSFT is the other big player in blockchain and I also own its stock.

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  3. Hi there Mr. ATM. Great analysis of IBM. I really like how you shed some light on blockchain as a technology and IBM's position in this. Usually when I hear people talk about IBM it's about how they kind of struggle to compete against Amazon and Microsoft with their cloud business.

    I also own some shares of IBM, although I bought them pretty expensive at $180 per share (Ouch!), but I'm holding them because I think IBM might just be able to jump on all these new technologies and therefore create whole new sales channels.

    Btw, interesting to see you have been working in the semiconductor manufacturing industry. Do you have an opinion on Texas Instruments (TXN)? I have been doing some research on that company lately as I think it might make a good addition to my portfolio of dividend growth stocks.

    - SD

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    1. Hi SD,

      TXN is the best of the breed and one of the few mature technology companies with double digit dividend growth.

      It is a dominant player in analog chips which are used everywhere from autos to industrial to home applications. Basically, analog chips provide an interface between the natural (analog) world and the digital world and as the world gets more and more digitized, the more the demand for analog chips to digitize natural systems.

      I would buy TXN in a heartbeat if the yield gets over 3%. So, will have to wait for a dip as the stock seems quite expensive at its current P/E even when compared to its 5-yr Normal P/E.

      But overall a great company and a stock.

      Thanks for commenting and take care.

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  4. Mr. All, Thanks for the review, especially on the blockchain business opportunity. I have owned IBM for a number of years and have been trying to decide what I should do with it recently. May take a tax loss and get back in after the 30 day wash rule based on your bullish assessment. Tom

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    1. Hi Tom,

      I would normally wait till the end of the year to take a tax loss, especially if there is no immediate risk to my principle or dividend.

      This allows me to look at the complete tax picture at the end of the year while collecting dividends, and then selectively apply tax losses to counter any gains I may have taken or want to take.

      The only time I would sell a stock immediately or at a loss is if company's fundamentals were deteriorating or if there was a risk to dividend or my principle amount.

      Thanks for the comment and stopping by.

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  5. Mr. ATM, I wish I saw this post a month ago when I was trying to decide which of 5 stocks to add to my portfolio. I didn't realize the block chain angle with respect to IBM. That might have won the day.

    I'm not really looking to add another stock anytime soon, but I love how the main graph is presented. I think I like it better than the radar because it's easier for me to understand.

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    1. Thanks DP. Glad you liked the main graph. I'm sure there will be more opportunities in the future to invest in blockchain related tech stocks, so don't sweat it.

      Take care.

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  6. I love the graphs and info provided. It certainly is priced attractively right now. And the dividend is very nice. I don't own any shares of IBM directly but I can see by the valuations that it wouldn't be a bad idea right here. Will keep an eye on it.

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  7. Hi Mr. ATM,

    Thanks for sharing the analysis of IBM. I appreciate you breaking down the applications for the Blockchain technology. Although I don't currently hold any shares, there was a time that it was one of my largest positions. I started buying around 2013 to 2014 between 160 to 180 based on the buybacks, dividends, and cash flow per share. Though I ended up selling during my year off (I needed the money), I have been planning to start building a position again. I still believe in the transition too. And the rate of dividend increases has been fantastic. Thanks for sharing!

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    1. Hi Graham,

      Hope IBM gets a bit more cheap so I can buy some more. I already have full positions in AAPL, CSCO, MSFT, INTC and QCOM. IBM completes my tech portfolio. I like old tech with solid and growing dividends, not a big fan of FANG stocks except AAPL.

      Thanks for stopping by.

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    2. I agree 100%. I much prefer IBM, CSCO, and AAPL to the Fang companies for the same reasons. Not a fan of Facebook even for personal use, not a fan of Amazons unpredictable business model, not a fan of Netflix competitors and fact that they have so much debt and no choice but to raise prices. And mostly, they don't pay dividends.

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