Thursday's Dow Winner: IBM

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Was it the fault of the Chinese economy or the U.S. economy? Either way, U.S. stocks finished in the red on Thursday, with the S&P 500 down by 0.9%. The narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) fared slightly worse, losing 1.1%. Only seven Dow components were winners on the day, one of them being International Business Machines (NYSE: IBM  ) .

On Tuesday, I highlighted a report that IBM was in talks to sell its low-end server business to Lenovo, and things have apparently moved swiftly along since then. Big Blue announced on Wednesday that it had signed a definitive sales agreement to sell the x86 server business to the Chinese PC manufacturer for approximately $2.3 billion.

That news has lifted shareholders' spirits after a disappointing fourth-quarter earnings report on Tuesday that saw IBM's revenue drop 5% -- its seventh consecutive quarterly sales decline. IBM had already shopped the server business last year, but concluding the sale is a measure of its determination to hopscotch onto higher-margin/higher-growth activities... which brings us to the heart of the matter. As the Financial Times' respected Lex column pointed out today:

IBM's previous divestitures look so smart now because they were followed by smart bets on the next big thing. It remains to be seen whether the company can repeat that crucial part of the trick. IBM sells well, but what it invests in is much more important.

So, what is the "next big thing" this time around? Steve Mills, Group Executive of IBM Software and Systems provides a clue with his statement that, "This divestiture allows IBM to focus on system and software innovations that bring new kinds of value to strategic areas of our business, such as cognitive computing, Big Data and cloud."

Big data and cloud (computing) are clearly growth opportunities, and IBM is now ramping up its offer in these areas after having been slow to recognize their potential. Last Friday, the company announced it is committing $1.2 billion to "significantly expand its cloud footprint," with plans to open 15 new data centers worldwide this year.

"Cognitive computing" refers to IBM's newly formed Watson unit. (Watson, an artificial language application, aims to provide answers to difficult questions phrased in natural language.) This looks more speculative in terms of its revenue and profit potential, although the company reportedly has high hopes for its future.

Will these be enough to power IBM through another iteration in its creative destruction/ transformation? Perhaps. What is certain, however, is that at 10.2 times next 12 months' earnings-per-share estimate, the market is setting a relatively low bar for IBM to step over. As I've mentioned a couple times previously, the current share price is not much above (<10%) Warren Buffett's cost basis on one of Berskhire's top equity positions.

A better bet than IBM: Here's the one stock you must own for 2014
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report, "The Motley Fool's Top Stock for 2014." Just click here to access the report, and find out the name of this under-the-radar company.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2807450, ~/Articles/ArticleHandler.aspx, 8/27/2015 8:38:44 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Alex Dumortier

Alex Dumortier covers daily market activity from a contrarian, value-oriented perspective. He has been writing for the Motley Fool since 2006.

Today's Market

updated Moments ago Sponsored by:
DOW 16,654.77 369.26 2.27%
S&P 500 1,987.66 47.15 2.43%
NASD 4,812.71 115.17 2.45%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/27/2015 4:35 PM
^DJI $16654.77 Up +369.26 +2.27%
IBM $148.54 Up +1.84 +1.25%
International Busi… CAPS Rating: ****