What's Wrong With IBM in 2013?

The Dow Jones index has surged more than 20% higher so far in 2013. It's a rare week when the Dow doesn't set a fresh all-time high nowadays, and the index jumped to another record high today.

But the Dow's rising tide is not lifting every boat in the dock. In particular, it's leaving one big, blue ship (chip?) behind. IBM shares are trading lower year to date. What's wrong with IBM this year?

First up, IBM is working under a brand-new CEO. Longtime leader Sam Palmisano retired at the very start of 2013, handing the reins over to his vice president of sales and marketing, Ginny Rometty. Having risen through the IBM ranks as head of consulting services, it's no surprise to see Rometty recast IBM in a more software- and service-focused mold.

But change is always difficult, and even perfectly executed changes of a long-term vision can hurt in the short term. In this case, the execution hasn't been perfect and IBM also ran into some headwinds out of its control. U.S. government orders have been soft due to sequestering and budget shutdowns, and an unexpected dry spell in China didn't help IBM's cause either.

The result: A company that hadn't missed an analyst earnings target since 2005 suddenly shanked three quarters in a row. To nobody's surprise, IBM's shares followed suit.

IBM Chart

IBM data by YCharts.

IBM's earnings are taking a break from their recent history of rapid growth, and top-line revenues are actually shrinking. The good news is, Rometty's IBM is actively choosing to drop low-margin contracts in favor of more profitable deals when possible. This tactic explains the flagging revenue trend, and also leads to stronger profit margins.

IBM Revenue (TTM) Chart

IBM Revenue (TTM) data by YCharts.

2013 was a mixed bag for IBM but a downright bummer for IBM shareholders. As Ginny Rometty's revamped strategy rolls out, it's fair to say that 2013 was a transitional year in Big Blue's century-plus history.

What's next for IBM investors?
The market stormed out to huge gains across 2013, leaving investors on the sidelines burned. However, opportunistic investors can still find huge winners. As the "dogs of the Dow" often do, IBM could be primed for tremendous gains in 2014 if Rometty's vision works out as planned. The Motley Fool's chief investment officer has just hand-picked another next-year growth opportunity in our new report: "The Motley Fool's Top Stock for 2014." To find out which stock it is and read our in-depth report, simply click here. It's free!

The article What's Wrong With IBM in 2013? originally appeared on Fool.com.

Fool contributor Anders Bylund has no position in any stocks mentioned. Check out Anders' bio and holdings or follow him on Twitter, LinkedIn, and Google+The Motley Fool owns shares of International Business Machines. Try any of our Foolish newsletter services free for 30 daysWe Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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