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The One Reason You Should Avoid This Stock

4 | By Michael A. Robinson

Over the last two years we’ve talked many times about how to make money on high-tech stocks.

Nearly all of our talks have focused on finding winners that offer a lot of upside. As I’ve been telling you, the road to wealth is paved by tech.

But that doesn’t mean you can blindly invest in just any tech stock. To ensure that you make money in the long run, you must avoid losses in the short run.

Today, I’m going to show you how to protect your portfolio’s value by dodging stocks with loser written all over them.

Specifically, I want to talk with you about a mega-cap tech firm that you need to steer clear from.

In fact, this firm violates a key rule of my five-part wealth-building strategy…

Big Black and Blue

I have read numerous stories about the turnaround underway at International Business Machines Corp. (NYSE: IBM) over the last several years.

There was another spate of positive stories last week after IBM reported first-quarter results that beat Wall Street’s earnings estimates.

While I’m glad to see the company making progress, I still see a lot of problems ahead. After all, the first quarter also was the 12th consecutive one in which IBM suffered an annual sales decline.

Even if IBM is able to lower overhead and boost earnings per share, that’s still not a recipe for long-term success. See, there’s an old saying in turnaround investing…

“You can’t cut your way to growth.”
                                                        
I know this area well, having served as a strategic advisor to a turnaround investment banker. I’ve seen firsthand just how much money you can make on turnarounds – if you pick the right one.

IBM is not the right one.

Virginia Rometty has spent her entire three years as IBM’s CEO trying to right a listing ship.

And she has made some good decisions, like getting IBM to focus more on Big Data. That’s a new field that involves using massive computing power to comb through mountains of raw data to find key patterns, such as spotting online fraud among billions of e-commerce transactions or improving efficiencies at warehouses and factories.

Rometty also has steered IBM more toward cloud computing, a trend in which vendors host data and applications for their clients at remote server “farms” and deliver it all over the Web.

But over the past two years, these moves have not paid off for IBM’s investors. Even after IBM rallied on a first-quarter win, the stock is still down 11% during those past two years.

That decline is even worse that it appears. During that same period, the Standard & Poor’s 500 Index gained 33.5%.

And the comparison with the S&P is being kind to IBM.

Had you focused on just a few of the high-tech winners I’ve brought to you here at Strategic Tech Investor, you would have crushed the overall market’s returns.

Just look at video-processing chipmaker Ambarella Inc. (Nasdaq: AMBA), which I first recommended in August 2013 – and a member of our Million Dollar Tech Portfolio. Over the past two years, it has advanced 437%, or 13 times more than the broader market.

For those of you who prefer the safety and liquidity of big-cap firms, compare IBM to Apple Inc. (Nasdaq: AAPL). In the past two years, the iDevice King, which I brought to you in October 2013, has advanced 120%.

The Rule Breaker

IBM’s subpar performance over the past few years stems from the fact that it violates Rule No. 1 of Your Tech Wealth Blueprint“Great companies have great operations.”

And those great operations almost always starts with leadership. Based on the track record I’ve seen to date, Rometty clearly is not the right CEO to return IBM to its glory days as a true innovator.

In no small measure, that’s because she’s spent her entire career at Big Blue.

In my experience with turnarounds, it’s rare to see a “lifer” get a big firm like IBM back on track. That’s because up-from-within executives grew up in a culture that is a big part of the problem in the first place.

Usually, a senior internal leader lacks the kind of outsider’s perspective needed to turn a laggard back into a leader.

To be fair, some areas where the embattled leader is making progress.

The Wall Street Journal recently ran a long analysis about Rometty’s tenure, which noted that she has spent about $8 billion over the past three years buying about 30 companies in her targeted growth markets.

On paper, it looks like she’s making progress.

For instance, Big Data, cloud computing, cybersecurity, social networking and mobile technologies made up 27% of IBM’s sales last year, compared with 15% the year before Rometty became CEO.

But as the sales mix has definitely improved, the overall revenue outlook looks bleak. During Rometty’s tenure, she has yet to deliver a single quarter in which overall sales improved from the year before.

And yes, she has gotten a vote of confidence from famed investor Warren Buffett. His Berkshire Hathaway Inc. (NYSE: BRK.B) is IBM’s largest shareholder and just increased its holdings from 6.3% of shares outstanding to 7.8%.

But I believe Buffett’s IBM involvement points up two key questions every tech investor should consider before taking a chance on this stock: What share price makes sense, and what is the appropriate time horizon?

Given IBM’s weak sales picture and market-lagging performance, I would only consider buying at what I call a “stupid cheap price,” one so low that you can afford to take a flyer.

I wouldn’t pay more than $150 a share, a 14% discount from today’s opening price… and then only if I could afford to hold it for many years, such as in a retirement account.

After all, I’ve clearly demonstrated that IBM isn’t a true growth stock. It’s not even a good foundational play that you can count on to give your portfolio solid support.

And it’s not really a great special situation play, either.

In other words, until the situation with IBM dramatically improves, I suggest you avoid this stock and focus on tech winners that offer a lot more potential upside.

I’ll be telling you more about those kinds of tech stocks in the days ahead.

P.S. I hope all are “Liking” and “Following” me at Facebook and Twitter. We’ve got a great community of friends, colleagues and readers there who are eager to make big money in tech stocks today.

[Editor’s Note: Are you already invested in Big Blue – or do you plan to do so despite Michael’s warning? Let us know what you think about IBM’s “turnaround” by posting a comment below.]

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4 Responses to The One Reason You Should Avoid This Stock

  1. Mattski says:

    Michael, I couldn’t agree more. Having worked in systems development for over 30 years, I have long known that IBM has ALWAYS been more about marketing (selling a bill of goods) than about technological innovation. Notice that even though IBM’s perennial rival from the 80s, Digital Equipment, foundered and went the way of the Dodo long ago, its most influential breakthrough, the VMS operating system, continues to dominate computing today…it’s only been rebranded as Microsoft Windows. Too, having just completed Rod Collins’ “Wiki Management,” it is intuitively obvious to even the most casual observer that IBM’s management structure virtually DEFINES the 19th century hierarchical management model – there’s simply no way it can compete in a 21st century collaborative world dominated by highly agile, forward-thinking, customer-centric innovators like Google, Zappos, Apple, and Amazon.
    IBM: Bringing you yesterday’s products tomorrow.

  2. aram says:

    I am long IBM, bought at $162 (before it sank to 150), and planning to hold until it again goes beyond $200, maybe $220. And I don’t think it’s gonna take too long. We’ll see.

  3. Houyhnhnm says:

    I made a note of a lukewarm buy recommendation on IBM on 7/3/2014 for very long-term investors. It closed near 188.50 that day. Now 14 points lower it’s an avoid.

    At least we got follow-up advice to dump this loser. I don’t remember sell alerts on other past buy recommendations that have fallen a lot further, such as ADEP and EGOV.

    Houyhnhnm

  4. Robert Vaillancourt says:

    The Information in your presentation is very impressive. I would love to invest with your company and benefit from your experience but I am not in position financially to do so. I have never traded stocks. I am 57 years old with an unsure retirement situation. My financial posture currently only allows me to risk or play with about $5,000.00. In an effort to educate myself and make a decision about investing in something like the coming Uranium boom I listen to your complete program withthe exception of the very last or hopefully very last comments.So here is my real comment: I’m not the smartest guy in the world but I do have a college education and wass groomed for business by my family and educational opportunities as well as owning several business’ over the years. I don’t know what the demographic is that your are targeting for this sale but it must not be to dummies. The repetition and the length of this lecture you provide as a presentation is tiring and frankly a bit insulting. Question: If the person whom you are targeting as a potenbtial customer is so ignorant that, and I mean no disrespect, he feels the need to sit all the way through this thing while listen carefully and making notes so he has the big picture well understood so as to make an informed decision when you ask for the order then why would you think that this person is qualified financially to afford your subscription price. If he is smart, educated, and can understand your key points does he really need to hear the same thing over and over? wouldn’t he be developed as a person who has accomplished enough to be financially qualified? In other words, the guy you are looking to do business with could have made up his mind a long time before you actually ask us for the order. It was painful sitting here thinking this guy is going to give me the company name any minute now. Holly smoke. I’m hoping the clientele you have is smart enough not to have to hear all of what you are pitching. The upside to this is that you are compelling like crazy. The information and the stats and everything you present are like a person has to be a dumbass not to invest with you right now tonught. In that respect you have more than accomplished the sales goal. It’s too long and you have to be losing soem potential business because of this and it gets to the point of stinking from selling and talking way past the close. I apologise for my little outburst here but it is in many ways a compliment. I hope you can see the positive part of my comments. In no way do I mean to disrespect or condesend. You have a brillent package and sokid information with the stats plus an irrefutable track record. I do believe your customer will buy faster without the hard sell add the repetition. YOU lower your image and status when you take it to the extreme. that ‘s what people selling bull crap products adn services do to convince the comsumer and you do not need to do that. You are powerful enough to show it, tell it , recap it, close it. please forgive the errors in my comment as I am sure there are soem. Have a great day and all the best. Oh, and of course some of this is just my frustration with myself for not being in a position to work with what you have to offer.

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