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International Business Machines Corp. (IBM): What Does Billionaire Jim Simons’s Renaissance See?

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Several weeks after the end of each quarter, hedge funds file 13Fs with the SEC to disclose many of their long equity positions in U.S. stocks to the general public. We track hundreds of 13Fs, using the included information to help us develop investing strategies; we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year (learn more about our small cap strategy). Because we keep track of filings over time we can also look for major changes in top managers’ portfolios. When we reviewed the 13F from Renaissance Technologies for the first quarter of 2013 (Renaissance’s founder, Jim Simons, has since become a billionaire), we noticed that the fund increased its stake in International Business Machines Corp. (NYSE:IBM) by over 450% since the beginning of the year, to a total of 2.3 million shares. This made it one of Renaissance’s five largest holdings overall (check out more of the fund’s stock picks).

International Business Machines Corp. (NYSE:IBM)’s revenue declined by 5% last quarter compared to the first quarter of 2012, with sales and services revenue each falling. While costs were also lower, pretax income ended up dropping by 6% though a lower effective tax rate caused earnings to be more or less unchanged (and a decrease in share count resulted in an actual increase in earnings per share). During the quarter IBM generated over $4 billion in cash from operations; with little cash being used on investing activities (except for that used to purchase marketable securities) the company was able to dedicate most of this cash flow to buying back stock, with moderate dividend payments (the annual yield is just under 2%) as well.

International Business Machines Corp. (NYSE:IBM)The stock currently trades at 14 times trailing earnings. We’ve seen that while revenue and net income have not been doing particularly well, International Business Machines Corp. (NYSE:IBM) can drive small increases in EPS through buybacks. As a result we would expect earnings per share to grow at least slightly going forward, and Wall Street analysts agree with their projections implying a forward P/E of 11. Warren Buffett’s Berkshire Hathaway is also a fan of IBM, having reported a position of over 68 million shares as of the end of March (find Buffett’s favorite stocks).

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