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Why IBM Stock Just Popped 5%

By Rich Smith - Feb 5, 2020 at 2:05PM

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A delayed report of an upgrade keeps the rally alive.

What happened

Two days ago (says -- or maybe it was only yesterday (says -- analysts at Edward Jones upgraded shares of IBM (IBM 1.11%) from "hold" to "buy." Whenever the upgrade actually happened, details on what it contained only began filtering out this morning -- and it seems investors really like reading those details.

After rising 1.8% on Monday, and a further 1.9% on Tuesday, IBM shares were shooting ahead a full 5% as of 1 p.m. EST today.

Green arrow rising over numerals 2020

Image source: Getty Images.

So what

So what are the details on this one? As TheFly reports, Edward Jones' upgrade is based primarily on the fact that IBM CEO Ginni Rometty is stepping down as CEO and Arvind Krishna is stepping up to take her place.

Curiously, these are the exact same details that sparked a 5% rally in IBM stock last week, which may not say much about investors' attention spans. Granted, Edward Jones also added that this change in management is a "positive catalyst" for the stock -- but anyone who's paid attention as IBM stock lost 22% of its market cap during Rometty's tenure could have told you that.

Now what

If there's one bit of information in this upgrade that may be worth paying more attention to, it's Edward Jones' observation that IBM shares look attractively valued -- but even here, I fear I must quibble.

Objectively speaking, IBM's price-to-earnings ratio of 14.8 may make it look like something of a value stock (and IBM's fat 4.5% dividend yield certainly makes it a viable candidate for a good dividend stock). Yet most analysts still think IBM will only grow its earnings at about 6.4% annually over the next five years. Whatever Edward Jones may believe, the idea of paying a double-digit multiple for single-digit growth still doesn't look like a very good way to make money.

To become a real "buy," IBM simply must grow faster.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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