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IBM's Loss Isn't Amazon's Gain

NEW YORK (TheStreet) -- Last week IBM (IBM) was taken to the woodshed for failing to deliver the earnings results investors were expecting.

That was last week --now I am looking at IBM as a discounted ticker ready to perform for those willing to buy when there is blood on the streets. IBM makes a excellent example of how options can improve our likelihood of success when fear has entered the hearts of shareholders.

Let's examine what happened and how to use that information to your advantage.

IBM is a victim of cloud computing. In the world of cloud computing Amazon.com (AMZN), Rackspace Hosting (RAX), F5 Networks (FFIV) and Microsoft (MSFT) are the leading players.

Google (GOOG), late to the game, does appear on the radar in the distance. However, for now it is just a twinkle in the eye of the world of cloud computing.

Amazon, F5 and, to a lesser extent, Rackspace have moved higher since IBM reported earnings. It's not hard to figure out why F5 and Rackspace moved higher. But Amazon? Please. Unless you hate money, there is no reason to bid up Amazon in the wake of IBM losing market share to the cloud.

Yes, I get the connection that growth in the cloud computing space is a benefit for Amazon, but margins in the cloud are overcast with a chance for showers. Amazon's margins fall far short of a Buzz Lightyear (To infinity and beyond!) earnings multiple, and if investors are anticipating growing profits for Amazon from the cloud space they should brace for disappointment.

Growth in cloud computing doesn't solve Amazon's dilemma of finding the elusive return on investment that sooner or later shareholders will demand. IBM, on the other hand offers a better risk versus reward ratio than Amazon. Actually, just about every other company in the S&P 500 paying a dividend offers a better risk to reward ratio.


After researching, you can find better opportunities such as Microsoft, a company I recently wrote about in "Microsoft Is a Buy Before Earnings Release." Another company is shown in "Surviving Oracle in an Amazon World," a stock that missed on earnings but is now trending higher.

IBM falls into the same category as Oracle. IBM is a technology titan that is now a value buy as a result of a minor speed bump on the path to profits. If you can look past the inability of analysts to accurately forecast earnings, you can own Big Blue with its 1.8% yield at a forward estimated payout ratio of under 30%.

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