This Tech Giant is the No. 1 Stock for Top Newsletter Advisers

This article was originally published on this site

© Provided by Dow Jones & Company, Inc.

IBM continues to beat out Apple as the most popular stock among the top performing newsletters I monitor.

Their relative popularity seems less outlandish today than when I first reported it this past June. That column prompted many of you to send angry emails insisting that these top-performing advisers didn’t know what they were talking about. IBM (IBM) is an old, stodgy, and washed-up company, you argued, while Apple (AAPL) continues to pull rabbit after rabbit out of the hat by creating new products that wow the market.

This week’s developments suggest that those advisers may not be so stupid after all. First, IBM reported that its latest quarterly earnings were well-above analysts’ expectations; its stock surged, turning in its second-best single-day price jump it its history. Meanwhile, Apple’s stock suffered one of its biggest daily declines in months on reports of a snag involving its Apple Watch in China.

The net result? IBM’s stock is now 6% higher than where it stood in early June, while Apple’s stock is up 3.2%. Furthermore, each the top-performing advisers continue to recommend IBM’s stock for purchase.

One of the top advisers recommending IBM is Gray Cardiff, editor of the Sound Advicenewsletter. Over the last 15 years, according to my performance monitoring, his model portfolio has beaten a buy-and-hold in the U.S. stock market by an annualized margin of 11.2% to 10.5%. The day after IBM’s earnings were reported and its stock soared, he wrote to clients to say that “although IBM was a better value yesterday, it is still a good value now.”

That’s because, Cardiff argued, “the stock is still selling at a P/E ratio substantially below the market. At $160 per share, the stock is only 11.6 times earnings, as compared to the overall market of 24. A P/E ratio of 15 puts IBM above $200 per share… While we are waiting for growth, the $6.00 annual dividend provides an attractive yield of 3.75 percent.”

Kelley Wright, editor of Investment Quality Trends, is another top adviser who continues to recommend IBM. I calculate that his newsletter is in first place for risk-adjusted performance over the last 30 years, having beaten a buy-and-hold in the stock market by 1.7 annualized percentage points per year with 12% less portfolio volatility (or risk).

In an email, Wright wrote: “I have long held that IBM has reinvented themselves more times than any other company I can think of. Clearly they aren’t as sexy as the FANG stocks, but their investments in Artificial Intelligence look promising. Also, their expertise in data storage doesn’t get any press or love, but they are way ahead of everyone else in storing data for the cloud.”

Wright added: “Despite all the calls that IBM was going the way of Eastman Kodak, I would note that their economic internals, return on invested capital, and free cash flow yield at 9% and 6% respectively, are not indicative of a dying company.”

To be sure, Apple’s performance in recent years has been far better than IBM’s, so you might wonder why its stock has lagged over the last several months. The answer illustrates an under-appreciated truth about investing: You don’t beat the market by picking the best company; you instead do so by picking the stock that most outperforms investors’ expectations.

This otherwise counterintuitive truth is made clearer if we imagine being allowed in a 10-horse race to bet on any finisher, and that one horse is the overwhelming favorite while the other is expected to come in last. Imagine further that the favorite horse finishes second, while the horse that was expected to come in last instead finishes seventh.

In such a case, you probably would make more money by betting on the seventh-place horse than the one that came in second — even though the second-place horse was a far faster horse.

IBM is the dark horse that the market expects to do poorly, which is why it continues to trade more as a value stock than a growth stock. Meanwhile, despite its hiccup this week, Apple continues to be the crowd favorite. These relative expectations are the key to understanding their stocks’ prospects going forward.

For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email mark@hulbertratings.com.

In case you missed this...