Why I’m Staying Away from Dell

One of my more embarrassing investments was Dell ($DELL). I still have nightmares. I totally missed the story going on there and I rode the stock to a big loss. But with investing, we always want to learn from our mistakes.

Dell’s stock currently appears to be a very good bargain, but I want to tell you why I’m not going near it. Wall Street currently expects the company to earn $2.03 per share for the fiscal year ending in January 2014. That means Dell is going for just over six times next year’s earnings. But those estimates used to be a lot higher.

In May, Dell’s earnings report was a complete dud. They earned 43 cents per share which was three cents below estimates. Wall Street hacked the stock from $15 to $12 per share.

Dell is a good example of a stock that appears to be a deep value stock, but we haven’t yet seen signs that the profits are still strong. Investors shouldn’t be drawn to Dell solely by the low share price. Remember that a trend will mostly likely last longer than you thought possible.

I have no interest in trying to pick the exact bottom. I can’t do that and I don’t know anyone who can. But I can spot a troubled company that’s able to muddle through. Until Dell gives us solid evidence that its business is still growing strongly, then I won’t go near it.

Value investing isn’t just about price. I’m perfectly willing to have someone else make the first 20% or 30% in a stock. What I want to see is proof of a strong business. Note how I’m still a firm believer in Ford despite all of its troubles. The reason is that the firm’s business is fundamentally sound. I was also impressed that they paid a dividend. Dell could improve its image in my eyes if they did the same.

The equation is price and proof. We need to see both.

Posted by on July 9th, 2012 at 12:23 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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