I rarely make available here for free what my subscribers pay to receive. Last week, however, was extremely volatile and I’ve received a flood of email asking for my take on the situation. In response, I decided to provide below excerpts from my March issue, delivered to subscribers early Sunday morning.
Before I do, however, let me summarize my take on the current market.
On February 4, I wrote:
The market will present some excellent buying opportunities in volatile months, but will rise overall for the year. I’ll be looking for buy times as we go through the year, and alerting readers here.
We certainly saw some volatility last week. We’re probably in for a bit more, but I consider this to be a generally good time to cherry-pick stocks at low prices. This is not a new bear market.
Here at The Kelly Letter, I always maintain a list of stocks to watch for cheaper prices. Most of them we never buy. A tiny minority we do, and almost always profit from them. There is nothing more important in stock investing than buying at the right price. It determines your entire experience.
Last week, our list went precisely where we want it go before buying, and that’s lower. Here are some highlights:
-9.3% e-commerce firm
-7.2% electronics manufact serv
-6.6% medical device maker
-6.0% gambling software maker
-3.5% semiconductor maker
+0.3% high-tech retailer
Despite this, we are still waiting because not one has reached our buy target yet. This patience is a hallmark of The Kelly Letter, and what kept us from feeling much pain last week as the markets plunged. Lower prices? Great, that’s what we’ve been waiting for.
Below are the excerpts from the March issue of The Kelly Letter. Enjoy, and if you’d like to receive all of my subscriber notes for a month for just a penny, please click here.
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This week, the market dropped dramatically on overvaluation concerns after a strong bull run, but the trigger for the fall was widely considered to be a plunge on the Shanghai market.
For the week:
Dow ……………. 12,114 -4.2%
Nasdaq …………. 2,368 -5.8%
Nasdaq 100 ……… 1,726 -6.2%
S&P; 500 ………… 1,387 -4.4%
S&P; Midcap 400 ….. 824 -5.1%
S&P; Smallcap 600 … 397 -5.7%
February closed lower, except for the Midcap 400:
Dow ……………. 12,269 -2.8%
Nasdaq …………. 2,416 -2.0%
Nasdaq 100 ……… 1,762 -1.7%
S&P; 500 ………… 1,407 -2.2%
S&P; Midcap 400 ….. 838 +0.6%
S&P; Smallcap 600 … 406 -0.5%
MONDAY sounded the screeching of the tires before the crash. Last weekend, the financial press distributed quotes by experts saying that the market has not corrected by even 2% since the rally began, and that such a correction is overdue. Sometimes, the media is right.
Following on those warnings, former Federal Reserve Chairman Alan Greenspan said that it’s possible that we’ll see a recession later in the year. That brought up talk of the inverted yield curve and how it presages recession.
Anything related to rates drops the axe on the financial sector, and bellwether Citigroup (C) saw 2% chopped from its value.
Then, the National Association for Business Economics said that 2007 will deliver the slowest U.S. economic growth in five years. It went further to say that Q4’s supposed 3.5% rate of growth was probably too high, and that it would be revised downward later.
These stirrings left the market poised for a drop, a widely-anticipated one, mind you. All it needed was a catalyst. That would come overnight from the far east. It would not be a reason, as the media reported, but it would be the trigger that the market had been waiting for.
The Dow lost 0.1% while the Nasdaq lost 0.4%. The advance/decline ratio came in at 48/48 on the NYSE and 39/57 on the Nasdaq. The NYSE high/low ratio was 287/23 and the Nasdaq’s was 173/43.
TUESDAY was the headline-maker, the evening news soundbite. Even non-investors knew that something had happened on Wall Street. The numbers tell the story better than words. In the S&P; 500, 498 stocks fell. In the Nasdaq 100, 99 fell.
The Washington Post’s story on Wednesday, headlined “Stock Sell-Off in China Hits Wall Street,” came complete with a map showing in Eastern Standard Time the Shanghai Composite down 8.8% at 2:00 a.m., the European Dow Stoxx down 3.0% at 11:30 a.m., and the S&P; 500 down 3.5% at 4:00 p.m. The description on everybody’s lips was, “Stocks had their worst day of trading since the Sept. 11, 2001 terrorist attacks.” More on China below.
The ongoing earnings slowdown, lingering valuation concerns from last weekend’s reading, Monday’s projection of slowing economic growth, and trouble in the sub-prime lending sector left the market in a puddle of gasoline just waiting for a match called “crisis” in any language to be dropped. China dropped it.
Then, a geopolitical match accelerated the conflagration when a Taliban suicide bomber attempted to kill Vice President Dick Cheney when he was staying at Bagram Airbase in Afghanistan.
Wall Street got manically depressive. A full 84% of stocks on the New York Stock Exchange fell; on the Nasdaq it was 89%. The Dow crumpled 546 points before rebounding to close the day down 416 points, suddenly negative for the year.
The investor fear gauge, the CBOE Volatility Index (VIX), rocketed 59%. That showed a lot of people buying put options in anticipation of further market declines.
Yet, what really changed?
The China story didn’t hold water. That market is the tail of the American dog, with a GDP smaller than Germany’s and less than one-fifth of America’s. Despite all the talk of China being the future, for the moment it is not all that important. To wit, in January, its stock market took a plunge similar to Tuesday’s. You probably don’t remember that because it didn’t do a thing to Wall Street.
The concerns of U.S. market valuation are overblown. Earnings are slowing, but they’re not gone. In recent weeks, there were signs of a blow-off top, but this is not the end of the 1990s when the bubble had been inflating for years. A little adjustment would bring fundamentals into a comfortable range, and should probably produce a positive year, as I still expect.
Finally, for stock pickers like us, a dropping market is just what we need to get the stocks we’re watching down to levels where we can actually buy them. That’s how we’ll be using further weakness. More below.
The Dow lost 3.3% and the Nasdaq lost 3.9%. The advance/decline ratio came in at 13/84 on the NYSE and 9/89 on the Nasdaq. The NYSE high/low ratio was 98/67 and the Nasdaq’s was 57/94.
WEDNESDAY brought some relief. It’s common after a dramatic move in either direction to meander back in the other direction for a day. Wednesday was that day.
It didn’t start well. At 8:30 a.m., the expected downward revision of Q4 GDP came in, taking the former 3.5% growth rate down to 2.2%.
At 9:45 a.m., the Chicago Purchasers’ index came in at 47.9% for February, the lowest it’s been since April 2003. The takeaway was that manufacturing is in trouble.
At 10:00 a.m., January’s new home sales hit the wires, and they fell 16.6% in the most dramatic drop-off that figure has seen in 13
years. Housing, yet again, was the burr under the saddle.
Luckily, also at 10:00 a.m. as the housing contagion should have begun to spread, Federal Reserve Chairman Bernanke spoke before the House Budget Committee.
He said that financial markets look to be working well and that he didn’t see a “single trigger” for Tuesday’s dive. Importantly, he assured the committee that there was “no material change” in the Fed’s picture of the U.S. economy. He even welcomed the downward revision of Q4 GDP as being “more consistent with our overall view of the economy” and gave a “reasonable possibility” that the economy will gain strength as the year goes on.
Mr. Bernanke addressed the sub-prime lending scare, saying that it should not seep into the rest of the economy and that he expects no liquidity problems.
The chairman’s words assuaged fears. The VIX dropped almost 16%.
At the beginning of last month, I wrote that 2007 would present some excellent buying opportunities in volatile months, but would rise overall for the year. We found out this week that Richard Bernstein at Merrill Lynch agrees.
“We are surprised that everyone is surprised by the increase in volatility,” he wrote in a Feb. 28 note. “Historical relationships between monetary policy and financial market volatility have shown relatively clearly that 2007 could be a year of rising volatility. The types of investments that tend to outperform during rising volatility did indeed outperform [Tuesday]: defensive sectors, larger stocks, developed markets and higher quality assets in general.”
The Dow gained 0.4% and the Nasdaq gained 0.3%. The advance/decline ratio was 61/36 on the NYSE and 52/44 on the Nasdaq. The NYSE high/low ratio was 85/33 and the Nasdaq’s was 67/81.
THURSDAY brought trouble from Asia again, this time from Japan. Hiroshi Watanabe, the vice finance minister for international affairs, spoke at a conference in London. He said that the yen carry-trade shouldn’t be considered one-way. “We should not be complacent. We should recognize the two-way risk,” he said, sounding similar to thoughts from the Group of Seven finance ministers meeting last month.
The yen carry-trade has been one of the easiest ways to make money over the past decade. In an attempt to get its economy going again, Japan dropped its interest rates to zero. Institutions borrowed yen at zero interest, converted it to other currencies, then invested it in low-risk instruments elsewhere in the world and pocketed the interest. Borrow $10,000 in yen at zero interest, put it in a U.S. money market fund at 5% or buy Treasuries, then sit back and watch the magic. Now make it $1 million. Now make it $1 trillion, and you get the idea. Why finance your house at 5% when you can finance it at, oh, 1% at a bank in Japan? These techniques have been wildly popular. Collectively, they’re called the yen carry-trade.
Recently, however, Japan has been raising its interest rates. They’re up to 0.5% now, and Mr. Watanabe said they will be moving higher, which will benefit Japan’s economy.
Speculators sold stocks to repay yen-based loans, sending the yen up 1% to an 11-week high against the dollar.
The larger concern is that a slowing down of the yen carry-trade will choke off an important source of money around the world.
These worries overshadowed a solid manufacturing report. The February ISM survey rose to 52.3 from 49.3 in January, indicating that fears of recession may be exaggerated. That cut the market’s early losses in half, but didn’t erase them.
Of little interest to the broad market, but of particular interest to us as technology investors, the inaugural Internet Merchants Association conference in Las Vegas produced some interesting tidbits. From notes taken by Cowen & Company:
- Every PowerSeller they talked to expects to generate a lower percentage of sales from eBay versus other online channels over the next few years (driven primarily by increasing fees at eBay).
- Attendees were very positive on Google (GOOG) Checkout.
- Amazon (AMZN) sent a large team to the conference and was aggressively marketing its third party services.
The Dow lost 0.3% and the Nasdaq 0.5%. The advance/decline ratio came in at 39/57 on the NYSE and 33/63 on the Nasdaq. The NYSE high/low ratio was 88/62 and the Nasdaq’s was 63/114.
FRIDAY saw the complete disregard for Mr. Bernanke’s soothing comments on Wednesday. The concerns of the day were a liquidity squeeze and a spreading implosion from the sub-prime mortgage market.
The yen continued rising, closing the week at 116.74 to the dollar. It was nearly 122 a couple of weeks ago. (The reason we say the yen was rising when this number was falling is that the yen’s value rose, hence a dollar buys less of it. The yen/dollar figure is more commonly cited than the dollar/yen figure, though both convey the same facts.) Could this be the start of the great unwinding that will choke off liquidity around the globe? That unanswerable question hung in Friday’s air like a gust from the subway near Broad and Wall.
In sub-prime lending land, Countrywide Financial’s (CFC) day-earlier disclosure to the SEC that delinquencies rose 19% last year aggravated implosion fears. The only thing keeping them in check was a demand by U.S. regulators for stricter standards on sub-prime adjustable-rate mortgages.
The Fed tried to keep spirits up again, this time with comments from Federal Reserve Bank of St. Louis President William Poole. At a conference in Santiago, Chile, he said that higher oil prices will not necessarily lead to inflation. Further, he noted that a recession is unlikely, the carry trade situation doesn’t appear to be disruptive, and that stock market valuation “does not seem to be elevated” at the moment.
My take was that a downward revision in Q4 GDP this week plays into the Fed’s goal of keeping inflation in check. You may recall from recent economic commentary that worries over inflation have been rampant. An economy that slows just enough to keep inflation in check but not so much that it triggers recession, is perfect. It’s what the Fed has been trying to achieve, and it looks achievable.
By and large, though, Mr. Poole’s words disappeared into the crisp Andean air over Santiago with little effect on a market intent on pulling to the sidelines ahead of the weekend.
The Dow fell 1% and the Nasdaq 1.5%. The advance/decline ratio came in at 24/73 on the NYSE and 24/72 on the Nasdaq. The NYSE high/low ratio was 74/45 and the Nasdaq’s was 58/95.
Here’s Econoday’s recap of the week:
A careful review of last week’s data shows only marginal changes in the direction of the economy. In summary:
- Manufacturing is nowhere nearly as weak as some believe new orders suggest. Inventory investment is down, leaving little overhang. Newer survey data show soft manufacturing but not manufacturing in recession.
- Housing is mixed and data are not reliable during winter months.
- The consumer sector is quite robust and will provide key support for manufacturing.
- Core inflation is still too high and the Fed will see inflation as a greater risk than too weak growth.
- Recession is nowhere on the horizon. We are likely to get a soft first quarter but then see better growth the rest of the year.
It was a heck of a down week in the market. We’re probably in for a little more downside before turning up again, but nothing too devastating.
Let’s take a closer look at what happened in China, what’s going on in the sub-prime mortgage market, how to take advantage of the down market, and Dell’s predicament.
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What Happened in China
On Monday, the Shanghai Composit
e closed above 3,000 points for the first time ever. On Tuesday, it fell 8.8% to 2,771. Markets around the world, ever-tuned to the growing dependency of one country on another in the global economy, grew scared that the Chinese economic engine was stalling. If China stalls, the U.S. will have trouble, and that’ll bring the whole economic train to a halt. So went the thinking.
Push past the headline, though, and you’ll see that the sell-off in Shanghai had nothing to do with China’s economy. It remains robust, buoyed by pre-Olympics infrastructure investment and solid consumer spending.
The Shanghai market has been red-hot. It’s a speculator’s playground, up some 170% in the last 18 months. That kind of runaway appreciation is not sustainable, everybody knew it, and the exit door was in the corner of every trader’s eye.
A little-known fact about the Chinese stock market is that not all of it is available to foreign investors. The Shanghai and Shenzhen markets are almost entirely for domestic investors trading the A shares of China’s companies. Foreigners are generally forbidden from buying A shares.
Roughly 5% of China’s population invests in its domestic stock market, but the number is growing rapidly as people learn of the easy money to be made. For instance, in all of last year 2.4 million people opened new investment accounts for the Shanghai exchange. In January alone, another 1.3 million came onboard. All that new money chasing already-inflated stocks has created a bubble in the domestic market, one that is not as out-of-control in the foreigner-dominated section of the Chinese stock market.
J.P. Morgan Chase studied this discrepancy and found that in early February, eight of the 37 companies listed on both the Shanghai and Hong Kong stock exchanges traded in Shanghai at twice the valuation that they sported in Hong Kong.
So, who’s calling the shots on the domestic market? All the new money has inflated a bubble, but the vast majority of ownership still belongs to the Chinese government itself. First, it owns majority positions in most public Chinese companies and, second, it controls around two-thirds of the shares traded on the domestic exchanges.
That’s a situation we’re not used to in the more democratic stock markets of the U.S., Europe, and Japan. Our markets are dominated by institutions, but there are a lot of big institutions, not just a central governing authority.
In China, however, the government can choke off any market performance by dumping shares. The crowd of new individual investors cannot prop up the whole market if the government sends it crashing down upon their heads. Besides, what suicidal investor would even try?
Now, the government doesn’t want its own wealth to be jeopardized, so it won’t destroy the market. What it wants is balance, a reasonable rate of growth that doesn’t put too much of the country’s wealth in too few hands too quickly. The people calling the shots are the ones reaping the rewards: Communist Party officials and their cronies in the business world. The last thing they want is a rebellion by the have-nots who see the cabal of bureaucrats in Beijing taking the country yuan by yuan.
Thus, Beijing has instituted measures to keep the market’s rise in check. It curbed margin lending. It reduced the money banks have to lend by raising reserve requirements.
Beyond that, two new ideas have led investors to the door.
First, there’s talk of imposing a 20% capital gains tax on stock sales. That leads to a direct reduction in the amount that new investors should be willing to pay for stocks. Everybody knows that Chinese companies are risky, so they expect the possibility of a high reward as compensation. The goal is usually a 100% gain.
Under new 20% capital gains taxes, what would have been a 100% gain from earlier prices will yield only an 80% gain. The price paid will need to be 11% lower at the buy to achieve the 100% gain.
For instance, say we’re discussing a 100-yuan stock. If we buy it and it goes to 200, we’ve made our 100%. Now, though, we need to pay 20 of that 100-yuan profit in taxes. To keep 100 yuan in profit, we need to buy the stock at 89 yuan and watch it go to 200. We need it to drop 11% from its 100-yuan price before we’re interested anymore.
Well, Tuesday’s 9% drop is pretty close to 11%. The market didn’t take long to prepare for the potential new tax regulations.
Second, the government is preparing new rules to control how it sells shares. It used to do so in large lots priced by net asset value, not market price. NAV is almost always lower than the market price. The government’s only tool for slowing a runaway market was to sell its own shares at prices lower than the market’s, hardly an appealing choice.
New rules under consideration would allow the government to sell at market prices and in smaller lots. This should produce more frequent government sales in an effort to slowly bring the domestic Chinese exchanges to par value with the foreign Chinese exchanges.
Guess when the National People’s Congress meeting to consider the new policies will be held. Next week. So, when was the final week to get money out of the domestic market before the potential re-calibration of prices begins? This week.
What a surprise that the Chinese domestic market sold off big-time, while the Chinese foreign market barely budged. When Shanghai fell 9% on Tuesday, Hong Kong’s Hang Seng index fell just 1.8%.
To paraphrase Bill Clinton’s 1992 strategist James Carville, “It ain’t the economy, Stupid!”
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The Sub-prime Mortgage Market
Sub-prime is a phrase describing a lending market sector. It’s also called subprime (no hyphen), B-Paper, B-tier, non-prime, low credit, and second chance.
Sub-prime borrowers are people with tarnished or limited credit who, therefore, do not qualify for prime market rates. They are a higher risk to lenders, so lenders charge them a higher interest rate. This is called pricing to risk.
Sub-prime lenders usually demand collateral for added security on loans. That’s why sub-prime lenders often serve customers looking to buy homes, vehicles, and furniture. These are real goods that can be repossessed if the borrower defaults. In America, the largest sub-prime lending market by far is in the home mortgage sector.
Because their market is inherently risky, sub-prime lenders are usually good at controlling risk. Last year, they were not. In a fierce competition for new business, they relaxed their standards and began writing loans for people who did not represent a prudent risk.
Friedman, Billings, and Ramsey (FBR) Asset-backed securities research analyst Michael Youngblood examined what happened and concluded that at the end of 2005, lenders changed from competing for customers on price (by lowering rates) to competing for customers on easy terms (by lowering lending standards).
That poor discipline has come home to roost.
Recently, home mortgage delinquencies and foreclosures have been rising in America as higher interest rates have sent adjustable rate mortgage (ARM) payments upward. On Thursday, Countrywide Financial told the SEC that delinquencies rose 19% last year. Naturally, the borrowers most at risk in such an environment are the sub-primers. Their finances are the most precarious.
Thus, prospects for sub-prime lenders such as Accredited Home Lenders (LEND), NovaStar Financial (NFI), Fremont General (FMT), and New Century Financial (NEW) have fallen dramatically. So have their share prices. On Friday alone, they fell 3.7%, 7.1%, 4.3%, and 7.6% respectively.
Look at these chalk lines on the pavement:
| Symbol | Price on 2/2 | Price on 3/2 | Change |
|---|---|---|---|
| LEND | $28.60 | $21.70 | -24% |
| NFI | $20.51 | $7.24 | -65% |
| FMT | $14.17 | $8.71 | -39% |
| NEW | $30.25 | $14.65 | -52% |
After-hours on Friday, the stocks dropped an additional 3.2%, 4.7%, 18.1%, and 25.5% respectively.
Not a great place to own stocks these days.
This concern about sub-prime lending has led to questions about the bigger economy. Could this lead to a housing sector meltdown? What would that do to consumer spending as the wealth effect of owning an expensive home disappears?
Such fears seem to me overblown. Outside of the sub-prime area, lenders are holding up. These boom and bust cycles are normal in the housing industry. Even within the sub-prime sector, new loans are already being written to more exacting standards and will bring a higher profit margin. The seeds of improvement have been sown.
I’m watching these stocks from afar. Housing lending, even sub-prime, is a good business. If these stocks get compressed enough, we may pick up shares for a recovery.
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How To Take Advantage of the Down Market
If you believe, as I do, that a new bear market has not yet begun, then the downturn is not bad news for you. It allows you to invest in our permanent portfolios at lower prices. It also brings our watch list closer to buying range.
Let’s look at some ways you can use the lower market to your advantage.
The first way is to send your monthly contribution to the permanent portfolios. Both Double The Dow and Maximum Midcap dropped more than 6% on Tuesday. They fell again on Friday.
Two weeks ago, they were up 5% and 13% respectively so far in the year. Today, they’re down 6% and up 4%. If you’ve been waiting for a chance to start one of these strategies, then wait no more. It looks like a fine time.
This weekend, Barron’s ran a cover story called “Still Betting on the Bull.” In it, reporter Andrew Bary wrote:
One place to hunt for value is the top 12 U.S.-listed stocks ranked by market value. Half the top 12 — ExxonMobil (XOM), Citigroup (C), Bank of America (BAC), Pfizer (PFE) and American International Group (AIG) — trade for just 12 times earnings or less. The richest stock among the dozen, Procter & Gamble (PG), fetches 19 times earnings.
Do you realize that every one of those companies, except for Bank of America, is a Dow component? Once again, our permanent portfolio approach via Double The Dow has you covered.
The second way is by checking the stocks you’re watching to see if any of them are now within buying range. Here at The Kelly Letter, our list came closer to our buy price targets, but nothing has hit quite yet. That’s good, because the market will probably jog a little lower before turning back up, so we may yet see targets reached.
The semiconductor maker we’re watching is just a 1.3% drop from our target price. The electronics manufacturing service provider is just a 3.5% drop away. I will send a note to subscribers if and when the letter places an active order.
Setting price targets on individual stocks is a great way to keep calm when the overall market serves up gyrations like it did last week. Those targets provide a relative comparison. You can say, for instance, “Yes, the market dropped, but my semiconductor maker didn’t get to my target yet.”
The third way is by examining parts of the market you hadn’t considered before for sudden sales. This is like strolling the clearance aisle at a store to see if there happens to be anything you need. If so, and it’s 20% cheaper than it was a week ago, consider buying.
For example, I have my eye on the sub-prime mortgage lenders mentioned above. NovaStar has a profit margin of 26%, a P/E below 4, and 11% insider ownership. Directors and officers of the company have been net sellers in the past year, and their instincts proved to be correct. One of these weeks, they’re going to start buying again. With the stock down 65% in the last month, the situation is worth watching.
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Dell’s Predicament
On Thursday evening, Dell (DELL) released its Q4 results and they showed what an uphill climb the company faces. Profits were down 33% on slow sales. The company made just $673 million, compared to $1 billion in the year-ago period. Desktop sales shrank 18%, even with the availability of Vista.
Dell couldn’t say much because in the middle of its business woes it’s also facing a federal accounting investigation, shareholder lawsuits, and customer service complaints. All it would say about initial restructuring plans was that it would create new methods of manufacturing and distributing computers, shorten development timelines, and make its operations more efficient.
Dell needs something more dramatic, and something tells me they’re working on it. All you really need to do to understand why Dell’s sales are suffering is look at the newest line of Pavilion notebooks from Hewlett-Packard (HPQ), and compare them to Dell’s line of XPS notebooks. The HP Pavilions are sleek, black, sculpted works of art with seamlessly built-in speakers, microphones, and web cams. The Dell XPS machines are the same blocky chunks that people have seen for years. Both sets of computers do everything you need them to do; the HP’s simply do it with style.
With prices and performance having gravitated toward a baseline that allows for almost no distinction between companies and machines, design is paramount. The same way cars are sold on sex appeal more than engineering stats, computers are going to be increasingly sold that way. All cars get you from A to B reliably now. All computers get your work done reliably now. They can all get wirelessly online, all boast humongous hard drives, all run the same apps, and all are fast enough to do what you want.
Nobody cares what’s inside anymore. There will always be the 1% segment of nerds that does, but the bulk of the market simply wants to get something cool home and start using it. For the same price, HP’s the better choice now.
The good news is that this is not hard to fix. Dell has good design capabilities and its acquisition of Alienware, whose computers are among the coolest-looking anywhere, will only bolster that. Imagine a line of Dell machines with an awesome new appearance, tied to printers with the same design heritage, and PDAs and/or phones that are clearly from the same family, and you’ve got the beginnings of a turnaround.
What else is missing? Proper distribution. Those newly designed, sexy machines need to be where folks can see, touch, and fall in love with them. A web site and printed catalog don’t cut it anymore. Getting beyond its direct model will be Dell’s greatest challenge, because it’s in the company’s DNA. Indeed, Michael Dell created the idea, and it remains to be seen whether he can let go of it somewhat to start a new sales channel. Direct will always be a good way to serve some customers, but it alone can’t get top billing anymore. HP proved that.
The analysts doubt Dell’s prospects.
Needham & Co. analyst Charlie Wolf says he doesn’t know what’s happened at Dell because the company hasn’t shared enough information. He says that he knew everything about Dell 18 months ago, but that he lost touch
with it when things began falling apart.
“I no longer think it makes sense for investors to buy Dell’s stock based on the it’s-so-cheap-it’s-a-bargain theory anymore,” he said. “Dell’s shares may be down 21% in the past 12 months, but it appears that the disappointments are far from over.”
ThinkEquity analyst Eric Ross has a $17 price target on the stock. He noted on Friday that Dell still trades at twice the valuation of its peers. “At some point, the reality of how difficult this company will be to turn around will drive this stock down, in our view,” he said.
Even if it’s successful, the turnaround will take a while. Michael Dell told BusinessWeek in mid-February that it would be 18 months before changes get the company back on track.
Perhaps, but the stock market won’t take that long to bid the shares higher. They probably have lower to go in the near term, but for patient holders like us they will ultimately make money.
Is this taking longer than I’d like? Sure. Is it too long? Not yet. Even if it takes 18 months for Dell to improve, we’d still be within a three-year ownership time frame. Say we double down at $20 and our average price per share is $23.67. We’d need only see the stock get up to $31.50 to match historical market returns of 10% per year. That seems easily do-able, and I expect the shares to do far better than that.
Dell fell below $20 last July. I’ll be looking to buy more shares near that level, if we get there again.
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On Deck
Mon 3/5: The Fifth Session of the 10th National People’s Congress opens in Beijing. This is the meeting that will discuss Shanghai market regulations, in addition to other subjects.
Fri 3/9: The U.S. employment situation for February will be reported. Nonfarm payrolls slowed to a 111,000 gain in January. They’re expected to have gained only 95,000 in February. January’s average hourly earnings increased just 0.2%, a pace slower than the end of last year. That was good news for inflation watchers. Next week, the market would like to see evidence of a soft landing in a slight gain in payrolls and a small rise in hourly wages.
That’ll do it for this week.
I hope you were able to sleep through the volatility. I can tell you from experience that this is just the stock market. This is what it does. We pay for our long-term gains with short-term pain. Viewed properly, the short bouts of sinking prices are opportunities, not disasters.
For the first time in four months, I’m working from my office in Japan again. It’s always with mixed feelings that I return. The U.S. is a wonderful country, and so is Japan. I’m blessed to have a foot in each, or perhaps I should say a fork. The roast beef in Colorado still haunts my dreams. Then again, no ramen anywhere in the states can touch Sano’s famous shops. My old friend, the chef in Oguraya, welcomed me back with a smile yesterday.
