(Please keep in mind that the author of this fundamental study is also a financial writer and portfolio manager.)
Based on options trading and an examination of the stock’s current trading patterns, International Business Machines Corp. (IBM) might fall over 20%. Shares of the company are at a vital technical support level, and options traders believe the price will tumble by January of next year.
After years of dwindling sales, investors have been patiently waiting for IBM to turn its company around. However, based on analyst sales and profit predictions, that turnaround will not only be delayed, but also almost non-existent. It equates to a low profit multiple of around 10.5 times 2019 earnings projections of $14.22 per share. (For more, read IBM: Still Seeking Signs of Growth.)
Bearish Options Bets
According to the January 18, 2019 long straddle options strategy, IBM stock might increase or fall by around 16.7% from the $145 strike price. It placed IBM shares in a trading range of $121 to $169. However, the number of puts outnumbers the number of calls, with 3,600 put contracts open interest vs 2,670 call contracts. Furthermore, there are almost 4,400 put options with open interest at that $135 strike, and with a cost per contract of about $7.20, the stock price would need to fall below $128 simply to break even.
Technical Breakdown Nears
IBM shares are likewise nearing a major technical trading level and are on an uptrend that began in early 2016. If the stock falls below the $147.50 support level, it might go all the way to $121, before reaching the next key support level, a drop of over 19% from its present price of roughly $149.25. (For further reading, see IBM’s Turnaround Story Comes to an End.)
Return to Growth?
Analysts predict that sales will rise by less than 1% per year in 2019 and 2020, after years of decline. However, the profits prognosis isn’t much better, with a 2.7% growth rate in 2019 and 3.7% in 2020. It seems that IBM’s low one-year forecast earnings multiple of 10.5 is not all that low.
IBM Revenue (TTM) data by YCharts
However, if IBM’s stock maintains its upswing or reports better-than-expected quarterly results in the middle of April, the company is likely to escape a dramatic collapse. Option bets may also be unwound and moved as a result. It makes IBM’s forthcoming quarterly results vital.
For the time being, IBM’s stock looks to be reaching a bottom, with options traders, technical charts, and analyst projections all pointing to a drop in the next weeks and months.
Michael Kramer is the Founder and Manager of Mott Capital Management LLC, a registered investment advisor, and the manager of the firm’s actively managed, long-only Thematic Growth Portfolio. Kramer normally purchases and keeps equities for three to five years. Click here to see Kramer’s profile and portfolio holdings. The information offered is only for educational purposes and does not constitute an offer or solicitation to sell or buy any particular stocks, assets, or financial strategies. Unless otherwise specified, investments involve risk and are not guaranteed. Before adopting any of the strategies outlined here, contact with a knowledgeable financial advisor and/or tax expert. The adviser will offer a list of all suggestions made in the previous twelve months upon request. Past performance does not predict future performance.
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