Earnings season is all about expectations... that’s it.
Companies like NVIDIA (NVDA), Amazon (AMZN), and Microsoft (MSFT) have softened over the last three months not because of bad earnings results but instead because of investor’s overzealous expectations.
Now, with companies like the Magnificent Seven forced to invest even more in their AI ambitions – to once again get ahead of investor’s expectations – investors may be heading into another quarter of hearing about Capex increases instead of growing margins.
It may be enough to toss stocks into an “October Surprise,” but there’s a solution.
They come in all forms, but they tend to sneak up and outperform the rest of the market during the earnings season.
Fundamentally and technically strong stocks that don’t have all the eyes from Wall Street focused on them, nor the headlines.
With lighter expectations, these stocks turn into juggernauts when they just meet their earnings expectations. And when they beat them, they can leave the Mag Seven names in the dust.
This week, one of the companies from the S&P 500’s Top 10 is an under the radar company.
IBM Corp. (IBM) has been one of the quietest performers among the AI-related names because nobody expects the company to post the results of an NVIDIA or Microsoft.
At a market cap below $250 million the stock flies well below the radar of most “headline investors” though IBM’s performance has been solid.
For almost two years now we’ve seen IBM’s earnings per share results trend positively with last quarter’s results hitting their best since 2021.
Revenue surprises have been on the rise as well, despite the company raising expectations earlier this year.
The results for 2024, so far, is that IBM shares are leading in the AI Service industry with year-to-date returns of 45%.
Despite that move in the stock, and the company’s operating results, Wall Street analysts remain on the sidelines.
Wall Street analysts currently see IBM as a hold. 35% of those with a recommendation have the stock ranked a “buy” with the balance of opinions in the “hold” or “sell” categories.
Similarly, Wall Street’s average target price for IBM sits at $207. That’s more than 10% below the stock’s current price.
This is akin to a good old-fashioned game of “Chicken”.
Analysts are holding out for IBM to fall back to their target prices to claim that they were “right” about not having the stock ranked a buy with higher targets.
Sure, it may happen, but here’s the other option, IBM just meets expectations and confirms that they are going to maintain their margins and profitability.
In that case, we’re set to see a huge “group think” from the analyst community as they break their staring contest with IBM shares and begin to upgrade the stock.
Those upgrades will break IBM into a new intermediate-term rally that could carry the stock as much as another 10-20% higher into the year end.
IBM continues to show itself as a great buy and hold opportunity for long-term investors. That’s the easy way to trade it.
We’re seeing some weakness in the stock ahead of the earnings report after the close on Thursday. That pullback may offer an opportunity to grab the shares at a light discount.
Investors that want to wait until after the report to add shares could consider the $220 level as an attractive price.
This price represents a 5% decline from current levels and is the site of some technical strength as seen in early October.
Should earnings bring the sellers out, the $210 level becomes the real “buy the dip” opportunity for the stock. This is where IBM’s 50-day moving average sits in a bullish trend.
Options investors should consider waiting until after the earnings report given the bump in option premiums.