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I'd say, "It's hard to believe IBM is 109 years old," but the truth is "Big Blue" has been showing its age for a while now.
Believe it or not, International Business Machines Inc. (NYSE: IBM) is actually one of the longest-listed companies on the Dow Jones Industrials, listed from 1932 to 1939, and most recently in 1979. The way the Dow is shedding "legacy" companies these days, who knows how much longer IBM will be there.
It was a little before my time, but once, IBM was the bluest of the blue-chip stocks – in fact, it practically put the "blue" in "blue chip."
There's a lot going on in the company's trophy case. IBM employees have been awarded five Nobel Prizes, five National Medals of Science, and a huge array of prestigious awards.
IBM manufactured the most powerful, widely used computer system in the world for nearly two decades. The company's track record of innovation was unmatched… for a while.
Don't get me wrong: This company is still pulling off impressive technological feats. It's just that nowadays, a whole lot of other companies are, too. Once it was one of the most valuable companies in the country; now it's in 34th place on the Fortune 500.
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Its stock is down from its 2013 all-time highs of $213, and not many analysts expect it to get back there anytime soon. Then again, it may not have to.
IBM still has one of the most popular, valuable brands in the word. Just close your eyes and think of "IBM," and I'd bet you can see its famous "eight bar" logo. And, like I said, it's still got more than a few tech aces up its sleeve.
And that is the key to IBM's latest move – why it made such a huge splash. And that's why I'm making a very, very rare buy recommendation today…
IBM Is Diving Headfirst into the Next 109 Years
Big Blue is staging a monster spin-off – by becoming two companies. It's the biggest shakeup there in a long time, and the way I see it, it's coming not a minute too soon.
IBM is basically getting rid of old, outdated tech and services that weren't helping its bottom line, and focusing on that innovative capacity that's still a crushing force to be reckoned with.
IBM will focus on what it calls the "Hybrid Cloud," which in simple terms takes an organization's computing power needs and data needs and provides them efficiently and, for the end user, seamlessly across many machines in far-flung locations. An organization can do more with the Cloud, and do it faster, than if it relied on traditional data centers.
That's probably oversimplifying, but what IBM's shareholders and would-be shareholders really need to know is that IBM has bull's-eyed a trillion-dollar market opportunity and is going after it with gusto.
This big pivot goes a long way to explaining why IBM was perfectly happy to shell out $190 a share, around $34 billion, to acquire open-source Cloud software provider Red Hat last year.
Some analysts couldn't see the play at the time, but then they probably didn't see this spin-off coming. Thirty-four billion dollars is money well spent when you're in the process of carving out a $1 trillion slice of the pie.
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IBM will also focus on its cutting-edge cognitive computing efforts. Cognitive computing isn't necessarily the artificial intelligence (AI) we've all heard so much about lately, but it's kind of a complimentary field. AI is all about creating new, intelligent machines, but cognitive computing aims to have machines learn and process information in some of the same ways humans do.
That's IBM's new gig in a nutshell. IBM's Global Technology Service division is the new spin-off.
"Baby Blue," (that's what I'm calling the new, unnamed company; IBM is calling it "NewCo" for the time being), will focus on managed infrastructure services.
Once the paperwork's complete, this company will instantly become one of the biggest managed infrastructure service providers on the planet, with a client list of 4,600 tech companies, 75 of which are Fortune 100 firms. It will also sport a mind-blowing contract backlog of $60 billion.
It's identified a $500 billion opportunity in taking its clients' managed infrastructure services – usually IT services – to the next level, modernizing them, and making them much more robust than they might be otherwise.
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Right away, those strategies strike me as being more focused and more lucrative than IBM's current approach.
I like it. Wall Street likes it, too.
The move will leave IBM a $59 billion company, while "Baby Blue" will be worth $19 billion to start. This is a great move. IBM is trimming old, low-margin operations and all those operating costs – in some cases down to zero.
And that brings us to how to play this development…
What Investors and Traders Should Do About IBM and "Baby Blue"
If you own IBM stock – and it is in a lot of portfolios – buckle up and sit tight.
The shares jumped something like 7% when news of the spin-off broke, but that proved to be a bit of a, shall we say, "sucker's rally," and the stock gave up a lot of those gains. I don't think that's going to be the case in the long run.
When the spin-off is finalized sometime next year, people who own IBM shares now will get some "Baby Blue" shares. IBM's board is playing it smart, and for shareholders, the transaction will be tax-free for federal purposes.
Don't sweat the dividend, either. Right now, it's yielding 5.17%, and the board is committed to making sure that both IBM and "Baby Blue's" yield are at least as high as IBM's yield alone in the last quarter before the spin-off is finalized. I think it'll be just fine.
If you don't own IBM or you want to own some more, well… I'd like it a lot more if shares were trading closer to $122. And I'd flat-out love it if the stock was going for its March 2020 "crash" prices of $100, but think about buying it here, down to recent support levels in the $118 range.
For the traders out there, beyond writing covered calls for extra income on this stock, the technical picture doesn't present the kinds of big profit opportunities we're used to with S.C.A.N., but it's early yet. When we get closer to earnings, then to the spin-off itself, we could see things pick up in a hurry.
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About the Author
Andrew Keene, editor of the 1450 Club, Super Options, and Project 303 at Money Map Press, is a globally known trader and a renowned expert on all things options.