Analyzing IBM

IBM is a buy, Cramer said during Wednesday’s Mad Money. Both the stock’s performance and the underlying business show bullish reasons to own shares of this company.

Wall Street’s biggest money managers lately have been enamored of technical analysis, the study of stock charts to predict future performance. Cramer, though, has always thought the practice more divination than discernment. He’s partial to fundamental analysis, which makes buy or sell calls based on macroeconomic factors and a company’s business prospects. But those managers move the markets. And if they’re watching the charts, other investors must do the same. That’s why Cramer’s been spending so much Mad Money time talking about the technicals.

IBM’s chart offers a number of positives, technical analysts say. The stock has climbed above its 50-day moving average, which tracks how close a stock hugs its short-term trajectory, and even on price pullbacks has managed to keep from dipping below that average. Chartists specifically seek out this kind of action. (Cramer prefers the 200-day moving average, he said, because it’s harder to manipulate and a truer measure of a stock.)

High-volume sell-offs in October and November, followed by IBM’s steady move up since then, are also good signs. They mean that the sellers are out and the buyers are the driving force behind the stock. And mid-January’s surge in buying volume, immediately following a sell-off, is a “sign of strength,” as chartists call it. Buyers overwhelmed the sellers and continued to bid up IBM, indicating that the stock’s headed higher.

If you asked for proof, technical analysts would point to the resistance line. Look at the chart below. Notice how IBM’s peaks continue to reach that line. Technicians believe that IBM’s ability to keep reaching that line means the upward trend should continue. Failure to touch the resistance line, on the other hand, means that either buyers are losing interest or shareholders are more willing to sell.

The only problem with the technical case, at least as far as Cramer sees it, is that chartists don’t think IBM isn’t worth buying if the stock can’t reach the resistance line. But investors who got in expecting those rallies to continue would have bought high and sold low, which of course is the exact opposite of what they want.


What about the fundamentals? Cramer thinks they’re great, actually, In fact, it was IBM’s quarterly report that sparked the mid-January buying. The company both beat the Street’s earnings estimate by 25 cents and guided higher than analysts expected for 2009.

Then there’s the switch from computer hardware to services and consulting. IBM’s main business now it to help companies cut costs and save money, which is what virtually everyone is trying to do right now. This is why IBM has managed to thrive during this recession while virtually everyone else tries merely to survive. The recurring revenues that this services business generates offer stability, and IBM’s $117 billion backlog is looking mighty stable.

IBM holds about $13 billion in cash, free cash flow in 2008 was up 15%, and the company’s buying back a ton of stock – $10.6 billion worth last year, and there’s still another $5.6 billion left to go. The 2.1% dividend yield may look small, but it’s decent for a tech stock. Regardless, though, management could easily raise that given all the cash on hand.

So it doesn’t matter which school of investing you follow, technical or fundamental analysis, they both say IBM is a buy.

Questions for Cramer?

Questions, comments, suggestions for the Mad Money website?