Thursday, July 1, 1999

Fall From Grace

by Stockstalker

As dedicated Fools, we should all strive to be long-term investors, according to accepted Foolish dogma, and I completely agree with that principle. The Rule-Maker and Rule-Breaker portfolios are based on this assumption and have done very well.

But what is a Fool to do when a substantial holding in a portfolio falls from grace? In my portfolio, I'm talking about Dell Computer (Nasdaq: DELL). I recently sold Dell at a very nice profit after holding it for over a year for the following Foolish reasons: It was a stock that I hated to part with, because I still believe strongly in the company, but I recognized that Dell has sadly fallen from grace on Wall Street... and the bigger they are, the harder they fall.

For the past four years or more Dell Computer has been the shining star of the Nasdaq, a favorite of both individual and institutional investors, and the paragon of everything that a high-tech company can do right. Earnings multiplied, the stock price soared, investors reaped the benefits of numerous stock splits, and the money poured in.

All good things must come to an end, though. In the last two quarters, Dell has finally gotten so big that investors who were routinely used to earnings surprises have been disappointed. I'm still amazed when a company meets earnings expectations for a quarter, boasts 41% growth in earnings, and is so badly punished on Wall Street.

Dell's "fall from grace" has much more to do with Wall Street's sentiment about the company and the overblown analysts' expectations than the intrinsic value of the company, which has not changed, and in fact looks very healthy. I hate when that happens.

I thought of holding onto Dell, but changed my mind when I thought about historically similar "hot" stocks that fell from grace in their time. AT&T (NYSE:T) was the "hot stock" long before I was even born. In subsequent years it maintained its blue chip status, but gradually became "Ma Bell" -- a very conservative investment for little old ladies. Thanks to a new CEO and recent imaginative direction, it's coming back. IBM (NYSE: IBM) was also a "hot stock" a few years ago, but it took several years and a drastic restructuring of the company to get it to where it is now.

When a huge market favorite like Dell falls from grace in the estimation of all the analysts and institutional investors, that should command some Foolish attention. I still like Dell, but I know better than to try and argue with sentiment or fight the tape.

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