After 100 Years of Service, IBM Corp. (NYSE: IBM) Is Still a 'Buy'

IBM Corp. (NYSE: IBM) has provided information technology (IT) products and services worldwide for 100 years, making it the very definition of a blue-chip stock.

And when the market gets weak and starts to show signs of volatility, it usually is the blue-chip stocks that are the strongest in the pack.

So with the markets going through a bit of a rough patch, let's look for an opportunity to pick up shares of IBM during any pullbacks (**).

Four Reasons to Buy IBM

There are four big reasons why I like IBM right now:

  • It's 100 years old, so you know it's stable.
  • The company generates $100 billion in sales, which is a level few companies ever reach.
  • IBM has an unleveraged balance sheet with $40 billion in gross profits.
  • And the stock is relatively strong, as it's currently trading near its 52-week high, even as the greater market declines.

When I think about IBM, I think about stability. The company has never been accused of trying to be sexy from a marketing point of view. Yet, IBM has grown into one of the largest companies on the planet and has built a good reputation for being conservative.

In high growth periods, stocks like IBM fail to keep up - but in uncertain times, they really shine.

The company has more than $100 billion in revenue. This is a shockingly large number -especially when you consider that the total gross domestic product (GDP) of many nations hasn't reached that level. Indeed, when you think about the size of its staff and the amount of revenue it generates, you could almost say that IBM is a small nation -economically speaking.

And if you want to take it a step further you could say that the company certainly has a more appealing balance sheet than many developed European nations at the moment.

IBM has $13 billion in cash and $30 billion in debt, which is a nice mix in the context of its market cap. This all helped to generate $46 billion of gross profit in the last year.
IBM has a market cap of about $200 billion, with an enterprise value of $215 billion once net cash and debt are included.
The stock is currently trading at the top end of its 52-week range, having closed Friday at $164.44.

Action to Take: "Buy" International Business Machines Corp. (NYSE: IBM) (**).

IBM is a "Buy" in today's market conditions. However, there is no reason to rush into stock, when we can be paid cash to be patient on our entry. Here is how.
We will want to look at selling naked puts, in this case I like the October 130 strike puts. (IBM111022P00130000).
The company stock price currently is in the low $160-range. It would have to pull back below $130 for these puts to be in the money. This is a great buffer of security, with us keeping the cash if the stock stays above $130 in October.
If the stock pulls back to the $120 range, which would mean testing its 52-week low, we will still have been paid a small cash sum to patiently wait for this fill.
If you are not comfortable writing naked puts, I suggest you put in a limit order in the $140s in case the company has a nice pull back.
(**) Special Note of Disclosure: Jack Barnes has no interest in IBM Corp. (NYSE: IBM).

About the Writer: Columnist Jack Barnes started his career at Franklin Templeton in 1997. He started out in the company's fund-information department - just as the Asian contagion infected the Asian tiger countries.

Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.

Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning on Mondays. In his BSH column last week, Barnes analyzed Bank of America. (NYSE: BAC)

News and Related Story Links: