Stock Market Direction by Steve Zito DELL Report
Dell Report. THIS ANALYSIS WAS WRITTEN JAN. 26, 2001
Despite its age, the conclusions still remain valid.
Steve Zito finished in the
TOP 2 STOCK TRADERS in the
Since hitting a low near $16 on Dec. 21, 2000, Dell Computer (DELL) has rallied 62% to $26 at the time of writing this report. I added DELL to the Model Portfolio on Dec. 19 at $18.50 based on technical analysis and my fundamental research. First, on a technical basis, by Dec. 19, DELL had fallen 66% (Fibonacci move) from $53 in July 2000. On Dec. 19, Relative Strength (RSI) for DELL was approaching 0, ranking it at the bottom of stocks for performance rank. Every major brokerage had been recommending a "strong buy" on DELL in July 2000 when it was $53. By Dec. 19, these brokerages said "sell" making public statements such as, "PC's are dead", "we are no longer recommending DELL", "we don't have a position in it". In other words, sentiment in DELL at $16 was rock-bottom in mid-December 2000. Stochastic readings Dec. 19 were close to 0, lower than April 14, May 24, and Oct. 10, 2000, the previous yearly low stochastic readings on DELL. With sentiment 100% negative, and all technical analysis indicators showing an oversold condition, Dec. 19 was the right time to buy DELL. Consider that DELL has been one of the best performing stocks on Nasdaq over the last 10 years. I wrote frequently last summer on the Internet web when DELL was trading at $53 about the lop-sided 100% buy recommendation consensus on DELL of investment house analysts. I wrote in July that DELL "had to fall to $26 based on price to earnings valuation compared to its peer group". DELL peaked at that time, and began to fall sharply for the last five months, overshooting my "fair value" of $26 on the downside all the way to $16, thus making it incredibly oversold on a technical basis. As for the fundamental side, a foreign currency shift in one of DELL's key markets, Europe, began in early December. DELL receives revenue from European sales paid in Euros. In December of 2000, the Euro appreciated versus the US Dollar from $0.82 to $0.96, a 17% gain on DELL's European revenue with no associated increase in expenses. In other words, extra unexpected revenue which flows right to the bottom line as currency gain. A similar currency shift is also starting with the Japanese Yen. Brokerage house analysts may not understand how foreign exchange markets function. Read my INTEL Review to learn more about Dan Niles who studied Engineering in college, not business. Foreign Exchange is taught in Finance classes, and most analysts tend to be schooled in the knowledge of the industry field they analyze (e.g. computer industry analyst Dan Niles studied engineering in school, not Finance). This explains why brokerage house analysts are incredibly inaccurate at forecasting stock prices. Brokerage analysts have been so busy downgrading DELL at $16, after it has already fallen from $53, that they missed the bottom, and only now, in late January, have investment houses (four of them on the same day!) begun to upgrade DELL, but only after it recovered to trade above $26. Fundamentally, DELL CEO Michael Dell recently met with President Bush in Austin, Texas (DELL's headquarters location) for a CEO conference on the economy. Do not be surprised to see increased government contract business. Michael Dell has been one of President Bush's staunchest supporters. And most importantly, DELL is a just-in-time manufacturer with a business model requiring very little inventory. Even in a slow growth economic environment, DELL can adjust production overnight, reduce costs faster than any revenue declines, and still bring in profit growth. In fact, DELL may have a unique ability to take market share from all of its competitors through its ability to maintain minimal inventories. DELL has consistently delivered growth in unit sales.
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