IBM Insight — Can IBM Deliver?

Julian Koski, Co-Founder and Chief Investment Officer, New Age Alpha
Apr 19, 2021 10:28:05 AM 6 min read

As we consider any stock, growth is always the key. In the case of IBM, many believe that growth has been the company’s weakness. Is this just human behavior at work? As other tech giants raced along during the pandemic rally, the venerable Big Blue didn’t appear to keep pace. Revenue continued to decline, just as it has over the past ten years and the stock, despite a sizable dividend, went nowhere. Of course, there is the chance that the stock became too cheap on a relative basis compared to peers such as Netflix or Amazon, whose models were practically built to withstand a nation stuck indoors. After all, even a poor company can be a good company at the right price. The Human Factor may have the answer.

The Human Factor measures the probability a company will fail to deliver the growth implied by the stock price. This may be caused by investors interpreting vague and ambiguous information in a systematically incorrect way. In IBM’s case, in which it effectively went nowhere, human behavior likely didn’t cause the stock to go sideways. But could it have kept the price too high?

Human Behavior’s Impact on IBM

  • IBM boasts a rich history, dating back to its formation in 1911. It helped in America’s war efforts, co-developed the first computer in 1944, and enjoyed a lofty status through the decades. In 1991 the company pivoted to become a primarily service-related company and, now, some believe the giant has the ability to transition into cloud computing.
  • If you ask a person on the street to name a blue-chip stock, chances are decent that many would name IBM—particularly if they are of a certain age. However, some observers believe that IBM’s “blue-chip” moniker left them long ago and that they’re, in fact, on their way to becoming obsolete. Who should an investor trust? The man on the street or a Wall Street pro?
  • The correct answer is, “neither.” At New Age Alpha, we seek to avoid the losers by using an actuarial approach similar to that used by the insurance industry. Put simply, we avoid the vague and ambiguous information. As of April 13, 2021, based upon IBM’s stock price and strictly the known financial information (financial statements, etc.), we believe there is a 97.0% chance that IBM will fail to deliver the growth implied by its stock price.
  • With a Human Factor of 97.0%, we believe that IBM appears unlikely to deliver the growth implied by its stock price. Remember, the lower the Human Factor the more likely vague and ambiguous information has NOT been priced into the stock.

IBM's Position in its Industry

  • As of April 13, 2021, IBM had a worse Human Factor score than every one of its peers in the Information Technology sector. Whereas IBM had a score of 97.0%, the sector had a median Human Factor of 47.3%. The sector was comprised of 73 companies and IBM’s score put it dead last.
  • A similar situation holds true within its Industry Group. The median Human Factor of the Software & Services Industry Group is 34% and IBM placed last in that Group, as well.
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Past performance is not indicative of future results. Current and future results may be lower or higher than those shown. An investor utilizing the Human Factor may experience a loss. No client or prospective client should assume that any information presented in this article serves as the receipt of, or a substitute for, personalized individual advice from New Age Alpha or any other investment professional. All research and data are simulated and should not be considered indicative of the skill of New Age Alpha.

The accuracy of the Human Factor is materially reliant on the integrity of the information utilized in the calculations, including any assumptions and or interpretations made by the user about the data. Data discrepancies, and user assumptions, can all contribute to differing outcomes. The underlying assumptions and processes presented herein are subject to change. New Age Alpha reserves the right, in its sole discretion, without any obligation and without any notice, to modify the information contained in this material, or to correct any errors or omissions in any portion of this material at any time.

The Communications Services Sector and Industry Groups referenced in this insight is based upon the Global Industry Classification Standard (“GICS”), which is an industry taxonomy developed in 1999 by MSCI and Standard & Poor's for use by the global financial community. The GICS structure consists of 11 sectors, 24 industry groups, 69 industries and 158 sub-industries into which S&P has categorized all major public companies. 

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