John, re: Just sold my trading position in Dell, and unloaded some long...
Only time will tell whether you have made a good decision, but I feel you are making a mistake.
1. The stock has hit a rough patch recently and lost some momentum, but that is hardly a reason to sell. Indeed, stocks sometimes offer their best buying opportunities during times like this. (example: Dell's first laptop model was a costly fiasco that threw investors into a surly mood. As a result the stock plunged and became a screaming buy). I don't mean to suggest you are a momentum investor, although there are times when you sound like one IMO.
2. Let's look at the perception problem Dell is facing. The questions surrounding Q3 and Q4 earnings are not the real problem IMO. Even if Dell's Q4 EPS comes in at only .19, that would still imply a 4Q/4Q growth rate of 22.6% -- not much below SUNW's just announced 24% growth rate. SUNW, let us not forget, is sporting a rather atmospheric 120 p/e compared to only 78 (trailing) for Dell. Moreover, the .19 figure is a pessimistic forecast as you yourself said. With any luck at all Dell should beat SUNW's number. So why then does the market price Dell below SUNW on a valuation basis? Obviously the correct explanation goes beyond current earnings, and stems from perceived differences in the long-term growth rates.
3. The real reason the stock has hit the doldrums, IMO, is the fear that "the pc is dead." While this possibility seems to have been exaggerated and carry more emotional weight than anything else, many investors apparently have bought into it. Never mind that the two best known proponents of this view (Ellison and McNealy) are masters of hyperbole, not to mention the fact that both of them have an axe to grind (i.e, promotion of thin client).
Others on this thread can speak to the issue of the PC's future, but let me offer this. I have followed the computer industry long enough to see how easily Wall Street can be taken in by faddish ideas. Remember when Windows NT was supposed to take over the world and drive SUNW to the wall and UNIX along with it? That was the conventional wisdom until less than two years ago. Here's another example: When I invested in Dell in May 1996, the conventional wisdom was that PCs are a commodity business. Because of this stigma of pure competition, the market priced Dell's stock at a 16/1 P/E. The commodity label made no sense whatever to anyone who gave the issue much thought. Dell was making huge amounts of money while other pc manufactures were suffering losses. Does this sound like pure competition? Also, Dell was making big inroads into the corporate space where Apple and GTW were going nowhere. In addition, the industry was undergoing radical change with an unpredictable outcome. None of this remotely jibes with pure competition.
4. Finally, let's make sure our expectations are kept in check. You stated that you expect Dell's stock to hit the mid sixties by the end of the year. Are you kidding? If that happens, your rate of return from this date forward would be ~50%! How can it make sense for you to be selling Dell now???
Geoff |
