Bill Cara: How bad is it at Dell? Fri., Aug. 18, 2006, 9:37 AM

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August 18, 2006

How bad is it at Dell? Fri., Aug. 18, 2006, 9:37 AM

So the "Gold"man Sachs doesn't like $GOLD or DELL these days. And Booyah Boy calls the Bristol-Myers CEO the worst in America. Holy explosions Batman, what's going wrong with the Cara 100?

I'll tell you. There are stories with legs and there are legs with stories.

Truly, what is fundamentally wrong with $GOLD, DELL or BMY? Are we really looking at something as dysfunctional as say Jerry Springer (focuses on)? Or are emotions rising to a peak, soon to be exhausted.

I'll try to get some Wall Street research on DELL. Clearly the market is concerned that (i) over 4 million Sony batteries came with defects, (ii) earnings for the quarter dropped from $1 billion to half that in the 2Q06, and (iii) apparently the SEC is investigating Dell's accounting and reporting systems with respect to revenue recognition.

For now, however, I don't see a change in ownership-management. I don't see a change in the business model. I do see market growth in emerging economies, plus a new round of Microsoft software on the horizon and the need for hundreds of millions of desktop and laptop users to upgrade their systems.

I also see an economy in trouble when it comes to capex as well as in the disposable income of the lower and middle classes ("the masses"), so, sure, the Dell operating results are not unexpected. But these cycles come and go.

The time to sell a Cara 100 is when the long-term stock peaks. This almost always follows a period of maximum hype by Wall Street talking heads and business media.

The time to buy a Cara 100 is when the long-term stock bottoms. This almost always follows a period of maximum trashing by Wall Street talking heads and business media.

What else can I say? These things go in cycles.

I hope that all of Humungous Bank & Broker gets behind the Sell rating for DELL, and the stock gets thrown on the scrap heap. I have not been in the stock since the Monthly-Weekly-Daily RSI peaked.

Moreover, I know that many of the so-called experts will be issuing Buy ratings at much higher prices within 12 months. They'll be doing it, regardless of price, when it's in their interest to do so.

And, when it comes to interests, I'm taking care of my own thank you.

I was selling DELL at over 40, and I'll be buying it back at under 20. Thank you Mr. Market. How many of you really catch on to this?

Posted by Posted by Bill Cara on August 18, 2006 09:37:32 AM | Category: 45 Info Technology , Cara Global 100 Best Companies

Discourse

I'm learning.... Thanks!

Posted by: DaveB at August 18, 2006 10:10 AM [link]

Bill,

In a past article, you noted that DELL was in your accumultation zone - price was $19.30 or so. Even after this trashing, still a nice gain, but even more importantly, a good lesson in risk management.

Putting your options strategies aside for a moment, this is a lesson on how watching the tape in real time and buying on downward price spikes can help to manage downside risk on simple purchases. After price spikes lower, it should rally and often does. Then, subsequent downwards price pressure will often simply be a "test" of the bottom. Even if it tests the low, the former purchase is not in the red, or if it is, not by very much - like DELL today. This works in Cara 100 type stocks, BTW.

g034

Posted by: g034 at August 18, 2006 10:12 AM [link]

Another great post. Many thanks.

Posted by: anewbie at August 18, 2006 10:12 AM [link]

Bill,

I agree with your call on DELL. Why has the market decided to ( a large degree ) punish DELL for exploding batteries when it was SONY that made them? Talk about shooting the messenger! My guess is that those who are selling DELL have the house on the other side of their trade.

Posted by: TerryC at August 18, 2006 10:15 AM [link]

Another good example is DOW which is being tested today with a posible EPA violation after a fine run from $34 just a week or so ago.

Posted by: C.Note at August 18, 2006 10:17 AM [link]

I think you can never really know on big strategic questions (can DELL's sales model rebound? its customer service improve? can INTC conquer new non-PC markets?) But they're pretty good bets. To rebound, they dont have to enter major new fields, mostly get back on top of their previous game.

Still, must'nt all such judgments be tentative? Maybe you do buy when RSI's go below 30, but don't you have to be ready to bail out if there's another leg down? And why not later hop off in a correction,and hop back on when progress resumes?

Trading costs are so low, slippage not bad in a liquid Cara 100. The tough thing is focus: keeping your eye on the ball - so you don't fail to act tactically.

Posted by: Jock at August 18, 2006 10:44 AM [link]

I agree that DELL is a good long term play, and the negative news will provide a margin of safety for those who get in now.

I have a question in regards to how to calculate the RSI, and how to interpret it as well, beyond the basic buy when it hits 30 and sell over 85, or whatever the levels are. Can you explain?

Thanks.

Posted by: rick s at August 18, 2006 11:22 AM [link]

Bill - I know you run the Cara 100 list imposing rigorous standards of performance and stringent safety measures. Rather than looking for an accumulation zone on DELL - wouldn't a SEC investigation warrant a dismissal from the 100 list? I know you gave the boot to UNH recently for a mishap. Just curious why you choose to leave DELL on with all the problems they seem to be facing. Maybe DELL will get a lot worse before they get a lot better and HPQ is picking up the pieces.

Posted by: sergio at August 18, 2006 11:44 AM [link]

Jock, good point re keeping your focus on the price. I have never said that RSI is the only indicator or that it is an indicator that always works or that indicators are anything more than "indicators" -- not proof.

In fact the RSI M-W-D dropped below 30 for DELL in 4Q05 and kept on dropping. But when the Daily did not recover, as it should have in a few days, that was a follow up indicator that DELL was having more troubles behind the scenes that we ought to be looking for.

To rick s, I have discussed RSI nuances recently. The 30-70 levels vary depending on when it is a Bull or Bear market, and whether it's a new Bull (huge, ustainable rally) or a late Bear (capitulation).

To sergio, the UNH (a former Cara 100) and AAPL were matters of corporate culture involving potential criminality, and that is a huge difference to an SEC investigation re accounting style. In fact, the indepenent auditors signed off on the DELL accounting, and I'll side with them over the SEC until we discover what matters the SEC really is probing, etc.

Posted by: Bill Cara at August 18, 2006 11:55 AM [link]

Rick s,

If you wish to play with rsi values and see calculations, I have a very simple spreadsheet at the link below. You can change the stock price and see the effects. The 1st example actually has approx. Nasdaq comp. values on the hour (10AM, 11AM, etc.) for the past 5 days (until yesterday 4PM). The 2nd example is smoother because it uses more points. Perhaps it's useful for somebody to play with (no guarantees of accuracy).

http://playumbrella.com/rates/RSI5.xls

Posted by: SiO2 at August 18, 2006 2:49 PM [link]