Paul,
This is becoming civilized, Kinda takes the fun out of it, but here is my rebut.
To the first paragraph, Name a company that has increased EPS every year, with no down turn. You can go back to 1875 if you like. This is part of that, All other things being equal, thing that bugs me. Today, companies that used have regular growth, like KO, are getting the same or better valuations even though their EPS numbers are deteriorating. DELL shows no signs of this as of yet. But the market is starting to not care about fundamentals. This has historically been a very bad thing for stock prices. I will add, I am long stocks that have ridiculous multiples. I guess I am a little fickle.
Your second paragraph I disagree with. The Risk for you is that the stock will go down. For me, that it will go up. As far as investing or trading or what ever you want to call it, That is it. Buyers Vs Sellers. What motivates both? Good question.
You say the higher the risk, the lower the price. This is incorrect. The higher the risk, The greater the potential for loss is. Price determines the Risk premium. A low price and high risk yields a low risk premium $ wise, but it still could be huge on a % basis. A high price and low perceived risk would indicate a low $ and % premium. However, (always have to have one of these) It is possible for a price to be high, the risk to be perceived low, valuations high, When in fact, The true risk is where investors perceive it to be. This is determined by investor psychology, not a mathematical formula. This makes it very hard to academically justify a stock price. We do know, When investors get scared, Book value, Dividend yield, Price to sales, These measures can be used to determine a buy point with some success, but it still ain't easy.
The DELL bulls think the risk is with PC demand, or the ability to gain or not gain market share only, or management performance. There may be some DELL bull that think there is no risk at all, I really don't know all the details on this one.
DELL, the stock's, real risk is not fundamental performance of the company. We are too far from the next EPS report for that. It is the risk that investors loose confidence in Dell the company to perform flawlessly. In the face of recent announcements within the industry, I think this risk is increasing that confidence may be shaken.
I take this opportunity to throw out another hurdle. With AMD close to raising $1 billion, + IBM's foundry, There is an increasing possibility that INTC could loose 10-20% of the CPU market to AMD, Due to their Slot 1 / socket 7 battle. This event, while it may not fundamentally hurt DELL, could add to the confidence risk I describe above.
Jim |
