Motley Fool: ‘Watson’ adds yet more value to IBM stock

IBM’s (NYSE: IBM) “Watson” supercomputer has signed up its first-ever commercial customer. The company recently announced that health insurer WellPoint has hired Watson to help its network of doctors diagnose illnesses and suggest treatment options.

We’ve long heard about how technology is going to revolutionize health care and dramatically reduce costs, replacing paper patient files with electronic medical reports, for example.

This hasn’t exactly come to pass, though, perhaps because the medical professionals who are supposed to charge less as they benefit from these technologies aren’t quite convinced of the savings (while being very aware of implementation costs). Watson, though, might actually succeed – since WellPoint isn’t a doctor. It’s an insurer that pays doctors as it seeks ways to reduce costs.

From an investor’s perspective, this is big news. IBM stock already looks attractively valued, with a price-to-earnings (P/E) ratio near 13 and a dividend yield near 1.8 percent. According to IBM, Watson has the potential to grow into a $1 billion-a-year business as rival insurers and perhaps even actual medical practices begin to sign up. That would boost IBM’s growth rate considerably.

This means potentially big profits for IBM shareholders. (The Motley Fool owns shares of IBM and “The Motley Fool Inside Value” newsletter has recommended WellPoint.)

Ask the Fool

Q: What is “front-running”? – I.V., Lima, Ohio

A: It’s a shady practice engaged in by some in the financial world. A mutual fund manager, for example, may buy shares of a company for her personal portfolio and then begin buying many shares for her fund, driving the price up and generating profits for herself. An analyst on television may talk up a company after having bought it for himself or his firm. A broker, knowing that his firm will be releasing a positive report on a company, may buy shares of it for himself. These are all examples of front-running, which in some cases is illegal.

My dumbest investment

Back when I was a young, skinny guy with a full head of hair, I bought 100 shares of Braniff. For you younger folks, it was an airline, one I flew often while on business in Texas and Oklahoma.

Frankly, the only reason I can remember for buying it was that Braniff had by far the hottest flight attendants of all the airlines I flew. It certainly wasn’t a good bet on the fundamentals. The company went bust, and I learned an important lesson: Do some real homework before investing in a company that isn’t making money. – W.D., Cincinnati

The Fool responds: Real homework is indeed necessary if you want to minimize your chances of nasty surprises. One thing to know is that airlines have generally been notoriously bad investments, often at the mercy of fare wars, rising fuel prices, bad weather, labor agreements, and more.

As for attractive attendants, it can be hard for companies to get away with discrimination. In the early 1980s, when Southwest Airlines tried to defend a policy of favoring attractive women for business reasons, its argument was rejected.