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IBM Is an Investor's Best Friend: Fund Manager

BOSTON ( TheStreet) -- IBM (IBM - Get Report), set to report earnings after the close today, could be the cornerstone of a portfolio for every investor thanks to the company's dramatic transformation over the last few years, one mutual fund manager says.

Founded 100 years ago, IBM has transitioned from a maker of tabulators and time recorders to hard disk drives and ATMs to consulting services and artificial intelligence programs. Despite the sweeping change of product offerings and services over the past century, IBM has been a stable rock for investors of all kinds.

"The stock makes sense for a broad array of investors," says Tom Villalta, manager of the Jones Villalta Opportunity Fund (JVOFX). "There are a lot of things to like about IBM. It has wide appeal. This is a company that has continued to deliver."

In addition to stability, IBM's stock offers investors ownership of a company with a relatively low debt burden, a solid backlog of business and a strong position in the information technology industry. Villalta says that IBM, one of his 35 holdings, represents 4% of the portfolio, making it one of his fund's largest positions.

While investors have been trained to measure a company's earnings per share and revenue against analysts' estimates, a bigger focus should be on IBM's major improvement in gross margins. IBM has boosted its gross margin from 37% a decade ago to above 46% last year. Analysts are forecasting the IBM's gross margin will rise to 46% in its second quarter from 44.5% last quarter and 45.6% in the year-ago period, according to a poll by Thomson Reuters.

"They've really repositioned the company to take advantage of more differentiated product offerings and getting out of more commodity-like businesses," Villalta says. "The move into services makes it easier for IBM to differentiate itself. It allows for higher margins and higher returns on equity. We really like that and it supports a higher valuation."

>>For upcoming earnings and estimates, see our Earnings Calendar.

One-hundred-year-old companies are rarely thought of as growth companies, but Villalta makes a case for IBM as an attractive growth play. "It's a classic growth stock at a reasonable price," he says. "It's something you can buy and hold onto for a number of years and experience growth in the U.S. economy."

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