IBM and CML Are Both Buys for Earnings Season

October 13, 2009

Welcome to another edition of Stock of the Week, a FREE weekly message where I give you my in-depth analysis on the stocks that matter to you most—with no mysteries and no strings attached. Just my take on the stocks everyone is talking about. Stock of the Week is designed to give you the information you need to make sound investment decisions, and will arrive in your email box every Tuesday after the market closes.

IBM and CML: Two Hot Tech Stocks

Quarterly earnings season is under way, and it’s “where’s the beef” time for stocks. Take Pepsi (PEP), which reported earnings before the bell last Thursday. The report revealed falling North American sales and investors were not happy. Shares proceeded to drop across the next two trading sessions even as the Dow surged by triple digits.

Or on the other hand, take Chevron (CVX), which offered good earnings and a strong outlook in its quarterly report on Thursday, and then posted two days of strong gains that made it one of the Dow’s best performers.

Like I said last week, earnings season is an opportunity to look under the hood to see what’s powering your stocks’ performance. Buying a strong stock in anticipation of a good earnings report can deliver big profits—and selling stocks before weak earnings can really protect you.

Last week, I gave you a few stocks that I wanted you to avoid. Being a successful investor is as much about spotting the losers as it is about buying winners. So now that we’re clear on which stocks not to buy, this week I have two great tech picks for earnings season that you should own: industry icon IBM (IBM) and an innovative small-cap firm named Compellent Technologies (CML).

I rate IBM a “buy” and CML a “strong buy.”

IBM rated “Buy”

About IBM: Formally International Business Machines, IBM (IBM) develops and manufactures information technology products and services worldwide. From PCs to servers to software to semiconductors, this stock is a true global tech player.

Current Strength: IBM was able to weather the recession much better than other tech stocks due to a very strong cash flow and substantial profit margins. The company has surged more than 50% year-to-date and is right up against its 52-week high. IBM has managed to grow sales and revenue across 2009 even as competitors struggled to stay flat, showing that this company is truly benefiting from the scale and name recognition it enjoys.

Future Outlook: IBM has met or exceeded Wall Street’s earnings expectations in each of the last four quarters, making me very optimistic that the company will have another strong report this week. While many tech firms like Apple (AAPL) and Research in Motion (RIMM) are chasing the next big personal gadgets, IBM is content to continue its dominance of the mainframe and server market. IBM’s dominance has even prompted an antitrust investigation, though I don’t expect any penalties or problems to ultimately come from this. The bottom line is that other tech companies have ceded this part of the computer market to IBM—and it is thriving as a result.

The Verdict: IBM’s fundamentals are strong, and the momentum is clearly behind this stock, so I am issuing a “buy” rating on shares. Though the cloud of an antitrust suit may cause a few near-term hiccups, in the long run I expect this stock to be vindicated and continue to move up.  What’s more, shares deliver a comfortable 55-cent dividend—adding even more value to this investment.

(For a complete in-depth look at this company, visit the Portfolio Grader stock report on IBM here.)