Top Picks 2016: International Business Machines

01/28/2016 7:00 am EST


Charles Carlson

Editor, DRIP Investor

In one of his early books, Winning with the Dow's Losers, Chuck Carlson developed the "worst-to-first" strategy of investing in Dow Jones Industrial stocks. The editor of The DRIP Investor believes this tech stock could be set for such a turnaround in fortunes.

International Business Machines (IBM) is coming off two bad years, so the stock is very much overdue for a rebound. When I look at IBM, I see a lot of similarities with McDonald's (MCD) a year ago; MCD was a Dow loser in 2014 that was a big winner in 2015) a year ago.

I see the likelihood of activist investors entering the picture at IBM. Sustained under performance usually brings out activists and there have been rumors that activists are either in the stock or starting to circle these shares.

I foresee a possible management change. When I chose McDonald's last year, I wrote that "I would be surprised if the current CEO makes it through another year." He didn't. Regime change at companies is often a positive catalyst for the stock, which was the case with McDonald's.

I believe the current CEO at IBM, Ginni Rometty, will be under intense pressure in 2016 to turn things around. However, I would be surprised if she makes it through the year.

Like McDonald's, which was yielding nearly 4% at the end of 2014, IBM shares currently yield nearly 4%. I suspect that yield will help provide a bit of support to these shares at these levels as well as draw some interest from cash-flow investors.

To be sure, I'm not necessarily a big fan of IBM's long-term prospects. But I do think these shares can beat the market over the next 12 months. IBM offers a direct-purchase plan whereby any investor may buy the first share and every share directly from the company.

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