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IBM: My Favorite Core Portfolio Holding

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Mega cap tech names like IBM (IBM), Oracle (ORCL), EMC (EMC), and Cisco (CSCO) bring a different mindset and take a unique approach to strategy development. It's not just about differentiation, but also to be more profitable than their competitors. In other words, having just a competitive advantage is not enough for a business to be able to corner high-barrier-to-entry markets and that is exactly what IBM does...

IBM will always be a favorite core portfolio holding of mine. Even when it does consolidate and pullback a bit, the healthy dividend rewards you for being patient and the company has cornered the services and analytics markets which are very high-barrier-to-entry. That innovation and vision over a decade ago with the strategy shift is why IBM is on a totally different playing field from the likes of Dell (DELL), Hewlett-Packard (HPQ) and Intel (INTC).

With IBM trading around $214, at the time of writing, does it still represent an attractive entry point? Absolutely. This is one of the most fundamentally sound companies you can own that consistently rewards investors by returning cash and creating shareholder value by investing in key growth areas like services and analytics. I also believe capital expenditures and information-technology spend will gradually get better in the second half of the year, and IBM will continue to benefit from that.

Let's take a look at some data points. IBM's analyst day a couple of weeks ago has provided some significant momentum for shares. I believe that there is upside to management's earnings forecast of $20 a share for 2015, and that focus on analytics, cloud, Smarter Planet and more software-related products will drive this outperformance. Management noted that the analytics segment should contribute $20 billion to 2015 sales, compared with its previous estimate of $16 billion and the $10 billion level seen in 2010. IBM remains one of my favorite core recommendations because of its stability, and I also see upside and improving margins as the firm further expands its software and services segment.

Trade Idea: You could buy the IBM Jul 220/230 call spread for $2.99.


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