IBM has been shaping up for the long term

Most of the coverage of IBM’s (NYSE: IBM) recent fourth-quarter earnings report relates to whether its expectations-busting quarter is further evidence of a tech rally already under way.

The reports largely ignored these important numbers: Total debt fell 23 percent, to $26.1 billion, and debt unrelated to financing customer purchases fell 61 percent, to $3.7 billion. Because of these aggressive debt payoffs, interest expense fell $111 million, or 57 percent. That’s why IBM earned 10 percent more in per-share net income in the fourth quarter, even in the face of 1 percent revenue growth. Debt reduction accounted for almost 29 percent of IBM’s earnings gain.

Numbers like these have absolutely nothing to do with a forthcoming tech rally, but they are indicators of competent management looking to position the business for the long term.

Revenue growth could return soon. The company’s services contract signings have improved by 9 percent to $18.8 billion and included 22 deals worth at least $100 million.

And Big Blue’s software division saw a slight bump over last year, mostly thanks to its WebSphere middleware for connecting business systems. WebSphere revenue rose 13 percent.

In the race to recover from a down economy, IBM is like a marathon runner – a slimmed-down beast that keeps getting in better shape.

Ask the fool

Q: Is it too late for me to refinance my mortgage? – S.H., Modesto, Calif.

A: Rates have inched up recently, but they’re still very low, historically speaking. Depending on your current mortgage’s interest rate and some other factors, refinancing may still be very beneficial for you. Learn more at www.fool.com/homecenter and www.bankrate.com.

Q: How does investing with margin work? – J.M., Victoria, Texas

A: Buying stocks “on margin” involves investing with money borrowed from your brokerage, on which you pay interest.

The upside is that it can amplify your performance. As an extreme example, imagine that you hold $100,000 of stocks and you borrow $100,000 on margin to invest in additional stock. If your $200,000 portfolio doubles in value to $400,000, you’ll have earned an extra $100,000 (less interest expense), thanks to margin. But if your holdings drop by 50 percent, they’ll be worth $100,000, and you’ll still owe $100,000 (plus interest). That will leave you with … nothing. Your holdings dropped by 50 percent, but margin amplified that to a total (100 percent) loss. Margin cuts both ways.

If you’re borrowing on margin and paying 10 percent interest, you should be pretty confident your borrowed stocks will appreciate more than 10 percent. If your margined securities fall below a certain level, you’ll receive a “margin call.” If you can’t add the required additional dollars, the brokerage will sell some of your holdings to generate the cash. This can sting, possibly resulting in short-term capital gains taxed at high rates.

Only experienced investors should use margin, and many do well avoiding it altogether. It’s smart to limit yourself to borrowing no more than 20 percent of what your actual holdings are worth.

My dumbest investment

My most recent dumbest investment move has been selling anything after March 2009. Several times I’ve sold when stocks had come down 10 percent off a high only to see them go back up above their previous highs. I figured the market had already risen nicely, and I’d already made a good profit on them, and I didn’t want to lose my earnings. I’m supposed to be in it for the long haul, but when things go up 50 or 100 percent, it’s hard not get twitchy on the sell trigger. But I’m learning to ride it out. – Josh Turner, Jakarta, Indonesia

The Fool Responds: When to sell can be a tricky decision. Some people like to get out after making a little money, but then they can lose out on making a LOT of money. Your best strategy is to not focus on how much you’ve made or lost, but on how much you expect to make in the future on a given stock. If it still seems undervalued, hang on. If it seems overvalued, sell. If you’re really torn, compromise and sell some of your shares.