IBM Traders See Stock Rising 10% Despite Weak Outlook

(Note: The author of this fundamental analysis is a financial writer and portfolio manager)

International Business Machines Corp. (IBM) stock has fallen 20% in 2018, most of it in the October sell-off. The stock's decline reflects the company's weak third-quarter results followed by its $34 billion acquisition Red Hat Inc. (RHT). Now, IBM investors may get a bit of good news. Some options traders are betting the stock will rebound 9% by the middle of April. Technical analysis also suggests that IBM will advance.

The bullish sentiment contrasts sharply with analyst forecasts of a yet another weak quarter when fourth quarter results are announced.

IBM data by YCharts

Bullish Options Bets

IBM call options for expiration on April 18 saw an increase in the number of bullish bets at the $130 strike price, to 15,000 open contracts. A buyer of those calls would need the stock to rise to approximately $134.55 to earn a profit from its current price of $123.00

The technical chart also suggests that the stock may be oversold. The relative strength index hit oversold levels below 30, and it would indicate that the stock is due to rebound. Additionally, the stock has risen above technical resistance at $117. Should the stock rise, the next level of technical resistance would come at $132, an increase of 7% from the current price. 

Bearish Fundamentals

Despite the bullish options and charts, analysts are forecasting unexciting growth for IBM in the fourth quarter. Earnings are estimated to fall 6% on a 3% drop in revenue. 

The estimates for 2019 call for even slower growth. Analysts forecast earnings will rise 1% on a 1% decline in revenue. Those estimates have been falling in recent months. 

IBM EPS Estimates for Next Fiscal Year data by YCharts

Despite the dismal forecast, analysts have an average price target on the stock of $156.29, which is 26% higher than the current price, which may be overoptimistic. Also, IBM may struggle to integrate its Red Hat acquisition, which was made to speed up IBM's revenue and earnings growth. That suggests that the rebound option traders expect is likely to be only short term.

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.