Motley Fool: After transformation, Big Blue is generating green

After a few years of causing pain for investors, shares of IBM (NYSE: IBM) bounced back in 2016, gaining around 20 percent. The company famously spent much of the last decade transforming itself from primarily a hardware manufacturer into a services company. Now it’s becoming a software and services company, thanks to increased sales in its key growth initiatives. IBM calls these areas – big data, analytics, cloud services, mobile and IT security – its strategic imperatives.

Progress appears excellent. For example, in fiscal 2016, IBM’s strategic-imperative revenue grew 14 percent on a constant-currency basis and now represents 41 percent of total revenue. That’s up from 27 percent at the end of 2014 and 35 percent from the fiscal year-end of 2015. Analysts see IBM’s revenue declining slightly in fiscal 2018, but earnings are expected to grow again.

One move paying off is the company shifting its software business to a subscription model. While total software sales have been in decline in recent years thanks in part to this shift, they have now increased for three consecutive quarters.

With IBM stock recently trading at a price-to-earnings (P/E) ratio near 14 and a dividend that recently yielded 3.3 percent, it’s a promising portfolio candidate that will pay patient believers to wait. A successful turnaround is not guaranteed, but there’s a lot to like about Big Blue.

Ask the Fool

Q: What are “same-store sales”? – T.L., West Palm Beach, Florida

A: Sometimes referred to as “comps,” they’re reported by retailers, reflecting sales at stores open a year or more. Imagine that Economical Aviaries (ticker: CHEEP) reports sales of $25 million in 2015 and $50 million in 2016. That looks great – 100 percent growth! But now assume that CHEEP had 10 stores open in 2015 and 20 open in 2016. If its same-store sales for 2016 came in at $25 million, then sales at its stores open for at least a year were flat and didn’t double.

If you boost your number of stores, then of course your total sales will probably rise. Some retailers might open many new units, but their average sales per store might be flat or falling. Examining same-store numbers can help you see the situation more clearly, comparing apples to apples.

Expansion can be good, but companies should be increasing sales at their existing stores, too. Sales growth solely through adding stores is unsustainable.

Q: What’s the short-term tax rate for stocks? – R.W., Canton, Ohio

A: The short-term capital gains tax rate is the same as your ordinary income tax rate, and it applies to stocks held for a year or less. If you’re in the 28 percent bracket and your gain is $5,000, you’d face a $1,400 tax bill.

The long-term capital gains tax rate, though, for qualifying assets held at least a year and a day, is just 15 percent right now for most investors. On a $5,000 gain, that would come to just $750. So if you’ve held your shares for almost a year, it might be worth it to hang on a little longer.

My dumbest investment

My dumbest investment was with a company doing a lot of business in China. It ended up being a total scam, but it was a successful “chart play” for a time. I just didn’t get out in time before it totally crashed. – M.T., Japan

The Fool responds: Many people get excited when they see the word “China” in relation to a possible investment. After all, the country has more than a billion people, which could translate to boffo sales. Some caution is warranted, though, when dealing with foreign companies or companies doing business abroad. Remember that political events (such as wars) or economic crises (such as lengthy recessions or imploding currencies) can wreak havoc on business.

Also, few countries require companies to disclose as much financial information to investors as the U.S. does. You can usually take some risk out of international investing by investing in American companies that do a lot of business abroad.

Your mention of “chart play” indicates that you were engaging in “technical” analysis of stocks, where much focus is on charts of stock-price moves and interpreting them. This seems a bit like voodoo to many investors. We prefer to engage in “fundamental” analysis of companies, studying their strengths, weaknesses, financial measures and trends, and so on. In short, we view them as the businesses they are instead of simply looking at how their stock price is moving.