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Should You Avoid IBM ETFs in Q2 Earnings?

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International Business Machines (IBM - Free Report) is scheduled to report second-quarter 2017 results on July 18 after market close. Being the world’s largest computer-services provider, it is worth taking a look at its fundamentals ahead of results.

IBM has bucked the trend of a broad technology surge this year, having shed 7.3% so far and lagging the Zacks categorized Computer – Integrated System industry. The downside might be limited as IBM could beat our earnings estimate though it has an unfavorable rank. Additionally, it saw positive earnings revisions, which are generally precursors to an earnings beat. Also, the company has attractive fundamentals.

Inside Our Methodology

The Q2 Zacks Consensus Estimate reflects substantial earnings decline of 7.5% and revenue decline of 3.8% from the year-ago quarter. This is rather disappointing for the company. Further, IBM has a Zacks Rank #4 (Sell) and an Earnings ESP of +2.56%.

According to our surprise prediction methodology, a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) when combined with a positive Earnings ESP has chances of an earnings beat. A Zacks Rank #4 or 5 (Sell rated) is best avoided going into the earnings announcement, especially when the company is seeing negative estimate revisions. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

However, the stock saw positive earnings estimate revision of a penny over the past 30 days for the second quarter. Analysts raising estimates right before earnings — with the most up-to-date information possible — is a pretty good indicator. Additionally, the earnings track record is respectable, with an average earnings surprise of 2.18% for the last four quarters. Further, IBM boasts a top Value and Growth Style Score of A each and a solid Momentum Style Score of B (read: 3 ETFs Loaded with Positive ESP Stocks).

According to the analysts compiled by Zacks, IBM has an average target price of $167.19 with 28% of the analysts having a Strong Buy or a Buy rating and 50% having a Hold rating ahead of earnings. This indicates an 8.4% upside to the current price of IBM.

What to Watch?

Investors will be closely watching revenues from the company’s strategic growth areas including cloud computing, security software, data analytics and artificial intelligence and whether these offset the slowdown in the company’s hardware and technology services business.

ETFs in Focus

Given this, ETFs having the highest allocation to this this tech giant will be in focus going into its earnings announcement. These funds could be the potential movers if IBM surprises the market despite its unfavorable Zacks Rank:

First Trust NASDAQ Technology Dividend Index Fund (TDIV - Free Report)

This fund provides exposure to dividend payers within the technology sector by tracking the Nasdaq Technology Dividend Index. The product has amassed about $708.3 million in its asset base while trading in volume of around 81,000 shares per day. It charges 50 bps in annual fees and holds about 89 securities in its basket. Of these firms, IBM takes the second spot, making up roughly 8.1% of the assets. In terms of industrial exposure, the fund allocates more than one-fourth portion in semiconductor and semiconductor equipment, followed by software (15.5%), diversified telecom services (14.4%), technology hardware, storage & peripherals (12.4%) and communication equipment (10.3%).

SPDR Dow Jones Industrial Average ETF (DIA - Free Report)

This fund follows the Dow Jones Industrial Average, providing exposure to 31 blue-chip U.S. stocks. IBM occupies the sixth position in the basket with 4.9% share. The ETF is well spread out across a number of sectors with industrials, information technology, financials, consumer discretionary and health care taking the top five spots with a double-digit exposure each. DIA is one of the largest and most popular ETFs in the space with AUM of $16.2 billion and average daily volume of around 3.1 million shares. It charges 17 bps in annual fees from investors and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook (read: Here's Why Dow Jones ETFs are Moving North).

WBI Power Factor High Yield Dividend (WBIY - Free Report)

This fund tracks the Solactive Power Factor High Dividend Index, which measures the performance of U.S.-listed stocks that exhibits high dividend yield and strong fundamentals. Holding 51 stocks in its basket, IBM takes the eight spot at 4.7% share. From a sector look, the fund is skewed toward consumer discretionary sector at 31% while information technology, financials and telecommunication round off the next spots with a double-digit exposure each. It has managed $35.1 million in AUM since its debut six months ago and trades in thin volume of around 11,000 shares per day on average. Its expense ratio is 0.67%.

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