Buy IBM Ahead of Earnings

IBM stock's long-term trend remains bullish, the charts show.
By Richard Saintvilus ,

IBM (IBM) - Get Report is set to report second-quarter earnings results after the closing bell Monday. With its shares now trading at their 2016 highs, there are two things weighing on investors' minds. First, can IBM's stock, which has risen 20% in six months, continue to rise? And second, at what point does it make sense to take profits?

IBM's success in 2016, which includes stock gains of almost 40% since its February bottom, has surprised a lot of people. But the stock has done what we've predictedbefore.

While it's tempting to take profits now, the risk vs. reward on the stock is still favorable. Look at IBM's stock chart  below, courtesy of TradingView. It suggests a rise toward $173, or 8% higher, is still possible by the end of the year.

IBM shares closed Thursday at $160.28, up 1.43%. The shares have risen 16.47% year to date, including 5% gains just in the past five days, compared with a 5.86% year-to-date rise in the S&P 500 (SPX) index. And you can see from the chart, IBM stock has made a strong 13% move from a June low of $142.50 to Thursday's session high of $161.40.

Despite the recent momentum and new buying interest, IBM stock still presents solid value on the fundamentals. Based on fiscal 2016 estimates of $13.49 per share, the stock is priced at about 12 times forward price-to-earnings ratio, which is 4.6 points below that of the average stock in the S&P 500 index. And the P/E drops to under 11 based on fiscal 2017 estimates of $14.09 per share. That means investors expect an earnings increase of more than 4%, reversing years of declining profits.

Add in IBM's 3.54% dividend yield, which is 1.54 percentage points higher than the dividend of the average stock in the S&P 500, and the stock is very attractive.

From a technical perspective, IBM's stock chart looks strong. The stock continues to trade above its critical 20-day ($152.45 -- blue line), 50-day ($151.01 -- pink line) and 100-day ($148 -- yellow line) moving averages. When excluding the post-Brexit dip to $142.50, you can see how the stock had established solid support at around $152, which created a base for its recent surge.

IBM is now shifting from being a slow-growth hardware-driven entity to now emphasize higher-margin businesses like consulting and cloud computing. The long-term trend remains bullish, suggesting a possible rise toward $173.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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