IBM in Predictable Buy Pattern

Dana is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I'm not usually one for technical analysis, but some companies are so large that they require it if you're to make good money on them. Take IBM (NYSE: IBM) for example.

A fundamental analysis may make you question the stock at its current price of about $192 per share. Amazon.Com seems to be dominant in the public cloud, having recently secured a big contract from the CIA despite IBM offering a lower bid.  This has sent IBM stock spiraling, anticipating a bad quarter, down 10% from its recent highs near $210.

IBM's Cloud Strategy

But IBM is not out of the cloud market. Far from it. It's putting recently-acquired Softlayer at the heart of a new cloud strategy, with 13 data centers and the flexibility to handle incoming links from private lines as well as the Internet. While the company supports open source Open Stack as its base infrastructure, the SoftLayer deal means it can also handle inputs from other infrastructure systems as well, including Amazon.

What the CIA was buying from Amazon was a private cloud based on Amazon technology, essentially a huge box into which it can pour web data for analysis of patterns and areas for further investigation. It doesn't need multiple standards, it doesn't need flexibility. It wants brute force.

But most clients are not the CIA. Private companies, and foreign governments, want flexibility in their cloud environments. They want to build hybrid clouds, moving data back-and-forth between their own systems and the public cloud in order to secure the best pricing when their own systems prove inadequte. IBM can now do this with full security. Amazon can't.

IBM can build you a custom cloud, handle hybrid cloud computing, and give customers full security in the public cloud. It has the people necessary to monitor security of an entire corporate network, pro-actively warning of threats through its ISS unit.

That's going to result in business.

Look at the numbers from some distance and you see a stock trading at a slightly below-market multiple of 13.77, with steadily rising margins on stable revenue. Analysts are expecting revenue to come in at $25.36 billion, with the lowest estimate of earnings 10 cents a share higher than last year, when earnings are announced next week. 

It's not sexy work, but it's steady. Compare it to some more speculative possibilities in the tech space. 

Speculating on Microsoft

Compare these figures with what you'd get from Microsoft (NASDAQ: MSFT). That stock has been on a steadier rise through the last year, but its Price/Earnings (P/E) multiple now stands at nearly 18, meaning investors are expecting big things.

But are big things coming? The company's revenues last year were only 3% better than the year before, and margins were down. So far this year margins are steady. For every business it has that's improving, like operating systems, there's a “Perils of Pauline” aspect to the company's headlines that should be troubling. The Xbox gaming system was considered a standout – but many are calling the launch of Xbox One, followed by the departure of entertainment head Don Mattick, a disaster. Its Azure cloud was considered a disaster a few months ago, but now it's expected to be a star because of a deal with Oracle.

Speculating on Apple

Apple (NASDAQ: AAPL) is another alternative investment, but it's also unpredictable.

The stock is currently selling at a super-low P/E of 10.1, but that's in anticipation of an earnings disaster to be announced this month, as it prepares to roll out a new set of products next month. Investors have seen the stock crash below $400/share twice in the last few months, despite an increased dividend and massive stock buybacks.

Even while some analysts see doom for the iPhone, and see Samsung's phablets beating the iPad in developing markets, the company is being called an e-book monopolist by a judge even though e-book prices are rising while Apple's policies have changed.

Apple has become a stock for bold investors who believe things are going to turn around. It's not for the faint of heart. I'm a Fool. I'm faint of heart. 

Technicians buy now

Over the last year IBM shares have been on a steady roller-coaster with a slightly rising inflection. From a low last July of $183, they got to $210 in October. Back down to $185.50 in November and then up to $215 in late March. Down to $187 in April and back to $210 in May. Now it's bouncing off a low of $191.

While the stock may hover around here for a little while, chances are the next move is up. There is nothing fundamentally wrong with the business. The company has become adept at adding high-skill people in growing markets, and laying them off in declining ones, so wages are no longer an issue.

It's a good time to buy. IBM is not a speculation. It's an investment. It's a stock you can accumulate steadily, based on technical patterns, and hold onto, or trade out of at predictable points of resistance. You don't have to be a Fool to like it, but it helps.

Dana Blankenhorn owns shares of Apple and International Business Machines.. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple, International Business Machines., and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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