This Stock is in the Bargain Bin

Shares of International Business Machines Corp. (NYSE:IBM) certainly took it on the chin [Wednesday]. IBM stock dropped over 12 points, or 7.5%, following lukewarm earnings and disappointing guidance. This was the worst day for IBM since April of 2013.

While a drop was warranted given the less than glowing report, the massive shellacking is getting overdone. I look for the carnage in IBM stock to come to an end.

Earnings were actually a headline beat, coming in at $2.45 per shares versus $2.42 consensus.

Revenues also exceeded expectations as well at $19.1 billion versus $18.84 expected.

So far, so good — except that all of the beat was due to a beneficial currency impact.

The company also provided guidance that came in shy.

The company now expects EPS of $13.80 for 2018 versus prior guidance of $13.83.

While a slight lowering on guidance of 3 cents (0.22%) deserves a lower stock price, it assuredly doesn’t deserve a 7.5% lower stock price.

The earnings torpedo also makes IBM a much better value at current levels. Assuming that IBM hits the $13.80 in earnings for 2018, the forward P/E is now at a very reasonable 10.78-well below the 17 forward P/E for the S&P 500.

The dividend yield now stands at over 4%, a big premium to the 2.867% yield on 10 yeast Treasuries. This combination of cheap valuation and attractive yield will likely begin to resonate with value investors.

IBM stock is fast approaching major support at the $147.50 level. This area held following the previous two earnings releases and may likely do the same again. It was also the springboard for a massive rally following earnings back in October 2016. A move back towards the 200 day moving average at $152.11 would be a short-term upside target.

IBM options are now trading at the 48th percentile of implied volatility (IV) following earnings. This means option prices are about average which favors spread strategies. So to position for IBM stock to hold support, a bullish put credit spread trade makes sense.

IBM Trade
Buy IBM May $140 puts and sell IBM May $145 puts for a $1.10 net credit

Maximum gain on the trade is $110 per spread with maximum risk of $390 per spread. Return on risk 28.2%. The short $145 strike is below the $147.50 support level and provides a 2.65% downside cushion to the $148.79 closing price of IBM stock.

— Tim Biggam

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Source: Investor Place