Earlie, Thread,
Thought you might enjoy the following posted on David Tice's website earlier today, by the "Retired Broker" - a knowledgeable guy who posts on a variety of stock market topics. His take on Dell is right in line with much of the discussion here. For that matter, the "Retired Broker" may be a lurker or participant here.
Peter
prudentbear.com
"Retired Broker" is short DELL...
Posted By: Bruce Walker
Date: Sunday, 2/14/99, at 12:48 p.m.
DELL
(Before reading this you should know I am not a disinterested party to
Dell,
having acquired put options on the stock a couple weeks ago, in a rare
but
compelling urge to make a "trading move". I also own a couple of Dell
computers and they are great.)
The collective "wringing of hands" over Dell is a common sign that a
definitive "top" has been reached in the stock market's speculative
bubble.
Without ever owning the stock, I've watched this thing ramp up for the
past
couple of years, ever since Business Week ran that article comparing
Dell to
Compaq in the race for the corporate PC market. Dell is a beautifully
managed
company that has hit all the right buttons at the right times. More
importantly, it has benefited enormously from once-in-a-lifetime
corporate
spending to upgrade computer systems for the y2k transition. This
"hardware"
spending is grinding down dramatically, as corporations shift resources
into
testing and software remediation. This is one reason Dell decided to
spend $70
million on consumer advertising, to go head to head with CPQ, AAPL, IBM,
HWP,
and everyone else selling in the personal PC market.
A careful examination of the PC market shows final sales trending below
manufacturers pipeline filling. There is a distinct possibility of an
inventory glut building, similar to what happened at CPQ and INTC last
year.
Meanwhile, Dell, which has a simple business model that avoids the
inventory
problem, is nevertheless faced with sharply declining unit prices that
cannot
be offset by rising unit volumes. Thus, sales growth is slowing from the
50% -
60% range down to 25%-35% range. The problem is simple: AT 110, THE
STOCK WAS
SELLING AT WELL OVER 100x EARNINGS, A MULTIPLE THAT CAN'T BE SUSTAINED
IN THE
FACE OF A SLOWDOWN OF ANY KIND. In addition, the stock recently enjoyed
a
"blowoff spike", a rather unusual development that frequently marks a
final
institutional buying panic, an overwhelming urge to own the stock, in
size,
after watching its "performance" pass them by for quarter after quarter
after quarter. The chart below clearly illustrates such a pattern: The
"spike"
AFTER a long run up, is a "kiss-of-death"
DELL - 1 year chart
One of Dell's problems is related to its industry - PCs. Unit prices are
falling rapidly, market saturation is higher that it was when Dell was a
smaller company, and competition has increased from HWP, IBM, and AAPL,
among
others. The business is moving in the direction of a "market share" game
and
further away from the "rising tide" effect of a rapidly expanding, low
penetration market. Another of Dell's quirks is the fact that the
company
plows
all its free cash flow into buying back its own stock at ever increasing
prices, at almost an infinite multiple of its book value. This has the
effect
of pushing the price up to keep the management's stock option "in the
green",
but it builds no long term stockholder wealth. It's a great scam as long
as a
bull market bails out the strategy, but when the bear comes along, and
the
company decides it needs the cash for other purposes, and the options
are suddenly locked in "in the red", and investor psychology turns
negative,
and management has to learn how to manage the downside, etc€well, then
"things" change.
This sort of "seismic shift" in one of the stock market's leading stocks
has
happened a number of times in my experience. Two prime examples come to
mind:
In the summer of 1968, Control Data, a maker of large, mainframe
computers,
was the darling of Wall Street. It, too, sold at a huge, unrealistic
triple
digit multiple of earnings, based on the institutional assumption that
its
brilliant PAST growth rates would be extrapolated into the infinite
future.
Over a period of days and weeks, it ramped up into an institutional
buying
panic, past 165, then a huge (for those days) block of over 300,000
shares
hit the tape at around 125, down about 30 points from the last sale. It
seems
that Gerald Tsai, a "star" portfolio manager at the Manhattan Fund, and
a long
term bull on the stock, had decided the game was over and had bailed
out.
There was the obligatory reflex rally as "bargain hunters" (an
endangered
species) jumped in to take advantage of the discount (and bail out the
broker
who had "positioned" part of the block). However, the stock never saw
its former high and eventually faded away to meaningless levels in the
20s. It
seems the company had decided to acquire a finance company (Commercial
Credit)
and Tsai immediately realized that this move pointed to a significant
slowdown
in the company's growth rate. He reasoned that a fast growing, "glamour"
company, moving into a prosaic business like a finance company,
suggested
"something different" and he wasn't about to wait around to find out
what that might be. WHEN THE P/E MULTIPLE IS IN THE STRATOSPHERE, ANY
SUGGESTION OF A "SLOWDOWN" IS FATAL.
Finally, Polaroid, the institutional darling of the late 1960s and early
1970s, passed through the "magic 100" P/E multiple in early 1973, when
it
reached 149 on $1.38 per share in earnings. At this time Morgan Guaranty
Trust, run by none other than Barton Biggs, was putting the finishing
touches
on a 3 million share position. Meanwhile, Dreyfus fund was in the
process of
unloading THEIR millions of shares, held since the early 1950s. Everyone
was
juiced up about the new Polaroid SX-70 and the prospects for instant
movies.
However, Jack Dreyfus was more concerned about the prospects for video
tape, a
new technology developed years earlier by Ampex Corporation and being
refined
by Sony, and the fact that Eastman Kodak was likely to become a
competitor.
PRD's monopoly and technology was about to become compromised, yet the
stock
was selling on its PAST, not its future. Shortly after reaching the
140s, Oppenheimer's photography analyst, Ralph Kaplan produced a 50 page
tome,
complete with fancy green and beige cover, raving about PRD's future and
projecting earnings out ten years, in order to justify the 100+ P/E
multiple.
A couple weeks later, a 485,000 share block hit the tape, down about 8
points
from the prior trade. The stock never recovered and sank to 13 within
the next
two years. It has never seen the old 1973 high since.
Thus goeth Dell, perhaps. The future can not possibly duplicate the
past. The
base is larger, the market has changed, a one-time stimulus to sales is
passing, and the world is simply not the same. Yet the P/E multiple has
never
been higher, and it recently crossed the "magic 100" P/E threshold on a
"blowoff spike". Investors with a sense of history should not be
surprised by
the recent "dip" in the stock's price. However, it is unlikely to ever
see
110 again, in my opinion. |
