LONGTIME IBM shareholders had reason to cheer last week when the stock reached a new high of $177.125. The previous high was $175.875, set in 1987.
Now Big Blue shareholders who stuck it out can hope for new records. But was sticking it out really the best thing to do? Look at how IBM investors would have fared had they bailed out and put their money into stocks that performed as well as the market average, represented by the Standard & Poor's 500 index.
The investor who dumped IBM at its peak of $175.875 on Aug. 21, 1987, and moved into the S&P; 500 would have earned a total return, including reinvested dividends, of 226.72 percent through Tuesday. IBM shares held that entire period returned 34.66 percent, mainly through dividends. (Examples do not account for taxes.)
What about the investor who moved from IBM to the S&P; 500 on Oct. 19, 1987, when IBM plummeted to $102 in the great Black Monday crash? The S&P; 500 returned 338.88 percent from then through Tuesday; IBM returned 104.73 percent.
Suppose the investor held IBM until it hit rock bottom, $40.625 on Aug. 16, 1993, then shifted to the S&P; 500? From then through Tuesday, The S&P; 500 was up 100.23 percent, IBM was up 286.8 percent.
So what is the lesson? The numbers underscore the value of good stock analysis over some automatic system, such as dumping anything that has dropped a certain percentage.
IBM's first big drop in October 1987 was part of the Black Monday crash that swept the entire market. But IBM wasn't just following the market. IBM's mainframe computer business was in a tailspin and profits were plummeting. The turnaround didn't come until 1993.
Smart investors should cut their losses and move on. But you have to look closely to determine whether a stock is a loser or an opportunity. When IBM was at $102 just after the big crash, it still had a lot of problems that spelled further losses, and dumping it was a good idea. But when it was at $40.375 in 1993, it was a bargain -- a good stock to buy and hold, despite its rocky past.
Opportunity in covered calls
Want to get an extra bang out of a stock before selling it? Then write a covered call.
Standard & Poor's, in its newsletter, the Outlook, says investors who own large blocks of optionable stocks can benefit from today's unusually large options premiums.
An option is a contract that gives its owner the right to buy or sell 100 shares of a specific stock at a set price for a given period of days, weeks or months. A "call" option gives you the right to buy stock, a "put" gives the right to sell.
An option contract is purchased through a fee, or "premium," based on such factors as the time left until the option expires and the difference between the stock's current price and the "strike" price at which the option owner can buy the stock. Premiums rise when stocks are volatile, as they are this spring.
Today's large premiums make it expensive to buy options. But selling, or "writing," options can be more profitable. The writer of a call promises to sell a block of stock at a set price if the call's owner exercises the option. A "covered" call is written by someone who already owns the stock involved.
Suppose you owned 100 shares of Microsoft. Wednesday, Microsoft was trading at about $117. Call contracts allowing their owners to buy Microsoft for $120 a share through mid-June sold for $4 a share, or $400 per 100-share contract.
So you could have written (created) one of those contracts. In exchange for the $400 premium, you promise to sell your 100 Microsoft shares. If Microsoft goes to $120 or higher, the call buyer would exercise, and you'd sell your shares for $12,000. If the stock falls, the option won't be exercised and you can either keep or sell the shares, or write a new call. You would have made an extra $400 to offset the price decline.
The risk, of course, is that Microsoft goes higher than $120 and you miss the additional gains because you have to sell. So write a covered call only if you wouldn't mind selling.
Pub Date: 5/19/97