Big Blue's Back in the Black

This column was originally published on RealMoney on Nov. 30 at 12:30 p.m. EST. It's being republished as a bonus for TheStreet.com readers.

It's big. It's blue. And it's back.

International Business Machines(IBM), the most seasoned technology stock on the board, is tearing up the track in the fourth quarter, beating all but a couple of its major peers.

In a two-month span when Microsoft(MSFT), Cisco Systems(CSCO) and Dell(DELL) have seen shares change 9%, -2% and -11%, respectively, Big Blue jumped up 13%, and it's still rockin'.

It's even way outperforming the Russell 2000 small-cap index, which is up just 1% this quarter. The only stocks outperforming IBM are new-age faves Apple Computer(AAPL) and Google(GOOG).

The emergence of IBM seems to stem from three factors.

First, its ascent indicates that investors have decided that mega-caps have been ignored too long and became too cheap. According to a Stanford Market Analysis report, the 8% rally since Oct. 21 in the venerable S&P 100 constitutes its most "consistent and aggressive" advance of the past two years. In the past three days, the megacap index has backed off a few points, yet it is still within easy striking distance of a four-year breakout.

The second factor, paradoxically, is that big-cap technology stocks face a tough challenge in 2006 even if global information infrastructure spending is robust. A strengthening dollar will sap revenue from all major multinationals, the first round of new rules on options expensing will disproportionately affect tech company earnings, and net margins, now at record highs, are on track, cyclically speaking, to shrink.

According to a Bernstein Research report, IBM has actually outperformed the S&P 500 overall in difficult investment environments, like the one that's looming, and underperformed in bull markets. Analyst A.M. Sacconaghi notes that this is probably because IBM's high level of recurring revenue and profits provides stability in uncertain periods but limits upside in more free-spending periods. While Sacconaghi does not expect a slowdown in tech spending next year, the analyst does expect to see a flight to defensive stocks that will benefit IBM.