IBM Common Stock (IBM)

Their debt continues to pile up and essentially have no earnings growth. Earnings growth is coming from share buybacks. Even though it looks cheap on a fundamental basis looking at the guts, stay away from this.

(A Top Pick June 30/14. Down 6.07%.) Had the 2^nd quarter in a row where they had poor numbers, so he sold his holdings in the $190s. Came very close to buying it back at around $150.

This is in transition, but it does have fundamentals. His model price is $200, a 15% upside. Pays a 3% dividend. Even if they disappoint on the top and bottom lines, they know how many shares to buy back to make the whole thing work.

Doing a lot of financial engineering to sort of prop up the numbers without a lot of growth. With any mature technology company, it is a challenge they all have. Once they go through that mature growth cycle, the question is how to bring on the next growth engine, which they are trying to do with cloud computing. The problem is that the base is so big it is difficult to impact the growth rate. There is definitely hope and they have good products. It’ll take a little while.

This company has no growth. Top line growth is minimal. For years they have been able to grow their bottom line by buying back stock and using their cash flow to do that. Their service offering is becoming more cloud-based, and they are trying to make that transition. If we get into a major correction, this will probably hold up well because it is a defensive name. Trades at a low multiple, but that is because there is no growth.

It is really tough. They are trying, but have not been successful in turning around the revenue declines over the past little while.

Starting to think this is looking a little attractive but would like to see it a little lower. Have a very, very strong balance sheet with a global suite of operations. They generally improve their dividend and do share buybacks. If you hold for a long period of time, you will make some money. It was very lofty at $192, but is now a little more reasonable. There is going to be some restructuring going on, so you are going to have to work through that. $130 is a Buy.

It has not been a pretty picture for IBM. 8% revenue decline over the last quarter.

Doesn’t like this one. Has been around for years and, early on, was a very innovative company. There is a perception that over the last 5 years, they have not really innovated. Instead, they have taken their cash flow and just bought back their own stock. As a result, they haven’t invested in R&D and new products the way they should have. In the last several quarters, the company has largely disappointed on earnings and growth outlook. A very big ship and is not going to be easy to turn around.

Has been one of the worst performers in the market in 2014, but feels it might be coming into its own in 2015. A lot of people are talking about how “old tech” is making a resurgence. This is one that he is quite positive on.

Gained a tremendous amount of benefit from a long 4-5 years of cost-cutting, and it was well orchestrated. They clearly articulated how they were going to cut costs to the benefit of the bottom line, and they did that. He has been very cautious on this for a number of years because you can only cut costs so much, before you start to cut to the bone and affect your ability to produce revenue. Revenue has really only grown low single digits for a very long time. The market was paying a multiple much higher than that for growth that had much more sustainability.

Stock has fallen off a bit in the last couple of quarters. Kind of flat lined and hasn’t really moved anywhere. Looks like it has reached a bottom in terms of the technicals. Over the last several years, you are seeing flat, even declining growth, and that is not something you want to see in a technology name. There are some concerns about their ability to compete in a fast-changing IT market. Trading at 10X forward PE and probably a 9% long-term growth rate. Dividend seems pretty secure.

Thinks this company is in real difficulty. He wouldn't own over the next couple of years. They have only supported their share price through financial engineering. For the amount of stock they bought back to keep their earnings growth up, they have done it all with debt, and they are running out of room to do that. (See Top Picks.)

80% of their business was hardware 20 years ago, and now it is 80% software. Generally constructive on this at these levels. But not out of the woods based on their missed guidance going forward. It's a question of what announcements come out and what they are working on in R&D developments. He has a “wait-and-see” approach.

There are other tech companies with good top line growth. IBM grows by buying back stock. There are a lot of better ideas in the tech world.