Cognizant Technology Solutions Corp (CTSH), International Business Machines Corp. (IBM): Is This Sympathy Sell-Off a Buying Opportunity?

It should be mentioned that some patience might be required before a turnaround occurs. I do not dispute that IBM suffers from the same headwinds as Accenture, however, the market may now be over-discounting fears of a slow down now could be the time to buy. The valuation of IBM is compelling at 13 times trailing earnings, or a PEG ratio of 1.36.

While revenue growth has been sluggish, the company has returned cash to shareholders at a remarkable rate and is set to repurchase $50 billion of stock over the next five years. At this rate half of earnings growth is the result of repurchases (5% per year), while margin expansion has continued to fuel EPS growth. For IBM shares to catch fire revenue growth must reassert itself, however, in the era of big-data this seems to be an eventual certainty.

SAP AG (ADR) (NYSE:SAP) declined 3.7% on Friday and is now down 9.4% YTD. SAP AG (ADR) (NYSE:SAP) is a German-based company and the leading provider of enterprise application software used for budgeting and accounting. SAP AG (ADR) (NYSE:SAP) has done well growing revenue at a 7.5% annualized rate, however, earnings growth has lagged indicating that margins have contracted over the past five years. At 23 times TTM earnings and a PEG ratio of 2.08, SAP does not seem attractively priced in light of the difficult operating environment for the sub-industry. As a result, I would need to see lower prices before putting money to work in the name.

The Bottom Line

Sympathy sell-offs are the greatest opportunities when investors fear that two companies will have equivalent results and jump the gun selling shares at a bargain price when little danger actually exists. As noted above, this is probably not the case here because the companies discussed above have growth headwinds.  However, because the market is punishing IBM twice: first for its own earnings report and again based on Accenture’s results, it seems likely that investors may now be overly bearish and the stock should perform well over the short and long-term.  Big Blue may be black and blue, but that should not scare long-term investors away from an attractive buying opportunity.


Brendan O’Boyle is long IBM. The Motley Fool recommends Accenture. The Motley Fool owns shares of International Business Machines.
Brendan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Is This Sympathy Sell-Off a Buying Opportunity? originally appeared on Fool.com is written by Brendan O’Boyle.

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