The DJIA has been a major laggard relative to the other U.S. equity indices in the past month, and one big reason has been the weak performance of IBM. Given that the Dow Jones 30 is a price weighted index, IBM has had a heavy influence on the price action of the broader index.
So how does IBM’s chart look after a tough summer? The stock has already broken an important initial support level around $188 (red), but it has held the more important January 2012 gap around $180-182 (green):
The stock’s descent has been ostensibly due to weak earnings results over the last 2 quarters, but there are many other companies that have shrugged off fundamental weakness to continue marching higher. In fact, on a fundamental basis, IBM looks not only cheap vs. the rest of the market, but also cheap vs. its own history. Here is the 10 year chart of IBM’s trailing 12 month P/E:
Expected earnings growth is still around 10% per year over the next 2 years. Investors and traders selling the stock today clearly don’t expect IBM to achieve that growth rate, but at 12x current earnings, a lot of bad news is priced in.
Moreover, the largest owner of IBM is none other than Berkshire Hathaway. While Buffett has not added more shares in the past 6 months, it’s still notable that he views the stock as a good value.
In the short-term though, the chart is still one of lower lows and lower highs. Price action needs to show more signs of stabilization before I get interested to play for a bounce. However, if the stock does inch down toward the $180-$182 area, and some positive divergences show up, this could be an intriguing bounce play given its fundamental valuation.