Everyone may be pessimistic about Dell Inc. (DELL), but I’m not.
In my last commentary I discussed the resurgence of technology. I mentioned that companies such as Dell or Microsoft (MSFT) may make a comeback. So this last month I put my money where my mouth was and increased my allocation in Dell, despite the stock’s decline.
Value investing is about discovering valuable opportunities – especially when no one seems to care about the company or the stock. When I invested in Sprint (S) back in June of 2011, the stock was priced at $5.19. Only a few days after I purchased the stock, it took a hit and started to decline dramatically, losing more than 100% of its value.
While everyone else was running for the exit, I held my ground and actually increased my position once the stock bottomed out at $2.21 in January 2012. Since then the stock has recovered nicely, and it is now at $4.95. My investment in Sprint at the $2.21 mark has appreciated 119% so far.
The reason I held my position at that time was because I did my homework and I knew what I was getting into. At the time, Sprint was facing many problems but I believed it was close to solving many of them. What I saw when I invested in Sprint was the company of tomorrow, not the stock of today. Sprint recently disclosed that it is in merger talks with Japanese wireless carrier Softbank (JP: 9984).
This is the same orientation I’m taking with Dell today. In June 2012, I opened a new position in DELL when the stock was priced at $12.13. Since then, the stock has declined. And again, just as everyone else was running for the exit, I purchased more. This month I increased my position when the stock was at $9.87, and I’m actually hopeful that the stock will continue to decline. If that happens, it will look even more attractive to me.
In September of this year, Dell began paying a dividend, which is yielding a nice 3.35% now. This is the first time in history of Dell that the company has paid dividends, and it shows their commitment to investors. I rarely invest in companies that don’t pay dividends, especially if the company is no longer growing anymore like DELL.
The major concern I hear from investors about Dell is that the company’s traditional hardware business is on the decline, facing stiff competition and not generating profits. I can’t deny that all that is true, but what I find more compelling is that Dell still has one of the best distribution models in the industry and is probably the only option for many companies wanting to upgrade their computer and peripherals in the near future.
The demand for hardware and software slowed years ago when most companies finally felt comfortable with the performance of their computers and software and didn’t feel the need to continually upgrade – many companies are still using Windows XP and desktop computers from the early 2000s.
For most industries, this is still working perfectly fine, but the pressure to upgrade technology has made a resurgence with the proliferation of mobile technology, touch screens, and new software distribution models that now focus on apps or online services. While most companies are still holding off on a major technology overhaul, the day is coming soon when they will be forced to upgrade that old 2001 computer running Windows XP, and what will they do then? My prediction is that they will make a large lump sum investment to overhaul their technology all at once, and the first company they will reach out to will be Dell.
When that happens, I’m sure more than one investor will say: how did we miss this? The truth is that sometimes the obvious is not so obvious.
While it is true that Dell has some debt issues – the company’s long-term debt has grown from $658M in October 2007 to $8.9B in April 2012, causing its debt to equity ratio to go from 0.09 in Oct 2007 to 0.86 in April 2012, I am confident that the company is taking the required steps to fix this problem. Since February 2012 the company’s long-term debt has been decreasing month after month.
Dodge and Cox, one of the value investing funds I track regularly, also made an investment in Dell in June 2012 when the stock was trading at $12.41. In fact, Dodge and Cox is one of the funds with highest ownership of Dell shares – currently they hold 24M shares at a market value of $301M.
In my opinion, Dell is a solid cheap stock, with a PE ratio of 5.66 that makes it a safe long-term bet. I will continue to track the stock over the next several months, and if the new course Dell has taken this year continues, I will likely increase my position even further.
The investments discussed are held in client accounts as of September 30. 2012. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or that investment decisions we make in the future will be profitable.
Certain of the information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. The manager believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
