01/04 16:30
Dell Seen as Value Stock by Windsor Fund's Freeman (Update1)
By Miles Weiss
Washington, Jan. 4 (Bloomberg) -- Dell Computer Corp., once among Wall Street's favorite stock picks, now is being pursued by a mutual fund manager who specializes in buying shares of out-of- favor companies.
Charles Freeman, co-manager of the Vanguard Windsor Fund, said he purchased 13 million Dell shares in recent months, meaning that Windsor now has almost 2 percent of its net assets invested in the No. 1 direct seller of personal computers.
The investment follows a plunge in Dell shares during 2000, when the Round Rock, Texas, company lost about two-thirds of its stock market value. Dell's fall was part of a broader decline in computer, Internet and some other technology stocks, making the companies cheap enough to interest value-oriented money managers such as Freeman.
``We are looking for opportunities to pick up some really good values in this carnage that is playing out in technology,'' Freeman said in an interview. ``Dell is about the best opportunity we have found so far.''
Many value funds such as Windsor have shunned computer and Internet companies in recent years because their stocks carried a high price-to-earnings ratio, a measure of the amount investors are willing to pay for each dollar of earnings. Stocks such as Dell commanded this premium because their earnings were expected to grow at a faster rate than those of other businesses.
Caution
Windsor's managers, including Wellington Management Co. LLP and Sanford C. Bernstein & Co. LLC, were particularly averse to buying technology stocks. The $16.6 billion Windsor fund -- part of the Vanguard Group in Valley Forge, Pennsylvania -- had just 6 percent of net assets invested in technology companies as of Oct. 31, 2000, according to a recent shareholder report.
By contrast, the average large-cap value fund had 13 percent of assets invested in technology as of Nov. 30, according to Bill Rocco, an analyst at Chicago-based research firm Morningstar Inc. Rocco said Freeman's interest in Dell follows the stock's plunge from a 52-week high of $59.69 last March. Dell shares fell 81 cents today to $19.19.
``Freeman likes to buy stocks that have fallen hard,'' said Rocco.
Freeman said he estimates that Dell will earn $1.10 a share during the fiscal year that begins in February. With Dell shares trading at about $20, the company's ratio of price to estimated earnings would be about 18, less than the multiple for the Standard & Poor's 500 Index.
That is a big change for Dell, whose P/E ratio, also referred to as an earnings ``multiple,'' exceeded 73 as recently as July. Dell's decline in share price and multiple caught the eye of other value investors, too.
`Good Value'
``Trading at a market multiple for the first time in years, Dell, we think, can grow at over twice the market's rate for the next several years,'' said William Miller, the manager of Legg Mason Value Trust Inc., in a recent shareholder report. Dell's stock, he said, ``once again represents good value.''
A market multiple refers to a P/E ratio similar to that of a benchmark stock index, such as the S&P 500.
Until recently, Dell was a classic growth stock, with revenue increasing at 50 percent a quarter from 1996 to 1998. During that time, Dell shares ranked as the best performer among stocks included in the S&P 500 Index.
Investors cooled toward the stock after Dell cut its sales targets several times last year, including a November warning that sales would increase only 20 percent for the coming fiscal year. While sales growth is a separate matter from earnings growth, the two often go hand in hand.
Windsor disclosed its technology purchases in a shareholders report filed with the Securities and Exchange Commission. The report stated that Windsor bought 6 million Dell shares and 3.3 million shares of Hewlett-Packard Co. as ``starting positions'' during the six months ended Oct. 31, 2000.
Freeman said that he bought another 7 million Dell shares after Oct. 31.
It's a smart move, according to Edward Keon, director of quantitative research at Prudential Securities, who believes many technology stocks have enough future earnings oomph to justify investment at current share prices.
``What growth rate do you need to believe for technology to justify buying at these prices?'' Keon said. For ``the superstar tech stocks, you need to believe they are going to grow earnings 12 percent or more over the next several years.'' |
