We recently published Jim Cramer’s Exclusive List: 10 Stocks to Monitor Closely. In this article, we are going to take a look at where International Business Machines Corp. (NYSE:IBM) stands against the other stocks Jim Cramer recommends to monitor closely.
On a recent episode of Mad Money, Jim Cramer emphasized the risks of straying too far from technology stocks, particularly the dominant tech companies, in today’s market. He pointed out how JP Morgan, despite being one of the best-performing banks, caused a stir by cutting its forecast, warning that estimates might be overly optimistic. This news hurt the broader market, dropping it by 93 points, although the S&P 500 saw a slight rise of 0.54%, and the tech-driven NASDAQ gained 0.84%.
“In this market, every time you stray too far from technology, especially the tech titans, you ultimately get slapped in the face by reality. That’s what happened today when the largest, and arguably best-performing, bank in the world, laid a huge egg with its forecast. They told us the estimates are too high, maybe way too high. That spoiled a big chunk of the market, ultimately dipping 93 points. The S&P inched up 0.54%, but the tech-heavy NASDAQ still gained 0.84%.”
Cramer explained that since the Federal Reserve gave positive signals, investors had shifted away from tech into other areas of the market. This shift was part of the “broadening out” that many investors had been waiting for, as it was believed to signal a healthier market. Financial stocks, which make up around 13.3% of the S&P 500, had been a source of excitement for those tired of relying on the leading tech stocks.
“For the past couple of months, ever since the Fed gave us the all-clear signal, we’ve seen money flow out of tech into long-neglected regions of the stock market. This is the fabled “broadening out” that people spent all year clamoring for. When we bring in more groups of winners, we’re supposed to have a much healthier market, at least that’s what they say. There are tons of financials in the S&P 500, about 13.3% of the index and the strength in those stocks was a source of much joy for everyone who had gotten sick of The Magnificent Seven.”
However, as Cramer noted, economic uncertainty and disappointing forecasts from bank companies disrupted this broader market strength. Daniel Pinto, the bank company’s COO, dashed hopes by signaling that the outlook for the bank wasn’t as strong as expected. The key issue was that net interest income, a critical measure for banks, was projected to miss expectations due to reduced capital market activity. For Cramer, this underperformance highlighted the danger of moving away from tech stocks too soon.
“But a funny thing happened on the way to that broadened-out market: we got economic choppiness. Or to use a more accurate phrase, we got guide-downs that were intolerable to any of the leaders, and the kiss of death to the stock of the bank. You can’t be a leader when you’re slashing your forecast for H2. That’s when the shareholders kick you to the curb and find someone new to follow.
But today, Daniel Pinto, the bank’s President and Chief Operating Officer, lowered the boom on the optimists who desperately wanted to buy something other than tech. The big bank told us that things are less bullish than we thought. There isn’t as much capital markets activity as we’d hoped this quarter, and most importantly, the estimates for next year are too high because of a likely miss on net interest income.”
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International Business Machines Corp. (NYSE:IBM)
Number of Hedge Fund Investors: 54
Jim Cramer is impressed with International Business Machines Corp. (NYSE:IBM)’s recent progress. He highlights their work with Watson, a powerful artificial intelligence system, and praises CEO Arvind Krishna for successfully transforming International Business Machines Corp. (NYSE:IBM).
“International Business Machines Corp. (NYSE:IBM) is doing quite well. We’re playing around with Watson for ESPN, which is unbelievable. I’m getting more and more impressed. Arvind Krishna has reinvented the company. He’s doing a terrific job.”
The positive outlook for International Business Machines Corp. (NYSE:IBM) is supported by its strong performance in artificial intelligence (AI) and hybrid cloud solutions, as well as steady earnings growth. International Business Machines Corp. (NYSE:IBM) has become a leader in enterprise AI with its “Watsonx” platform, which has generated over $2 billion since its launch and is fueling significant growth in AI and hybrid cloud areas.
In Q2 2024, International Business Machines Corp. (NYSE:IBM) reported earnings of $2.43 per share, surpassing analyst expectations, and achieved $15.77 billion in revenue—up 1.9% year-over-year—driven by a 7.1% increase in software revenue. International Business Machines Corp. (NYSE:IBM)’s gross profit margins improved to 56.8%, showing its operational efficiency. Despite economic uncertainties, International Business Machines Corp. (NYSE:IBM)’s strong demand for cloud and AI solutions, especially in its consulting and software segments, underscores its resilience. Consulting revenues reached $5.18 billion in Q2, contributing to its strong performance.
Additionally, International Business Machines Corp. (NYSE:IBM)’s commitment to shareholder value through dividends and effective cash flow management makes it attractive to long-term investors. With expected modest earnings growth and a focus on high-margin, innovative sectors, International Business Machines Corp. (NYSE:IBM) is well-positioned for continued success.
Diamond Hill Capital Long-Short Fund stated the following regarding International Business Machines Corporation (NYSE:IBM) in its first quarter 2024 investor letter:
“Among our bottom Q1 contributors short positions in Dick’s Sporting Goods, International Business Machines Corporation (NYSE:IBM) and Palomar Holdings. Though we believe the quality and durability of IBM’s free cash flow-generating capabilities remain questionable, investor sentiment has improved amid optimism for the company’s still-nascent AI product suite.”
Overall IBM ranks 8th on our list of exclusive stocks Jim Cramer recommends to monitor closely. While we acknowledge the potential of IBM as an investment, our conviction lies in the belief that under the radar AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than IBM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
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