One of the great maxims of traders and Wall Street pros is to follow the "smart money."
I'm not much for the thesis that institutional shoppers tend to make smarter investing decisions, but many of you who've read my ruminations on insider buying say you'd also like to know how the Big Money is betting. Your wish is my command.
Next up: Dell (Nasdaq: DELL ) . Are institutions bullish or bearish when it comes to this PC maker?
|CAPS stars (5 max)||**|
|Bullish pitches||723 out of 1,094|
|Highest rated peers||Super Micro Computer, Globe Specialty Metals, NCR Corp.|
Data current as of March 7.
Fools can't agree on whether Dell is a beautiful investment opportunity or a value trap waiting to spring. I can see both arguments.
The bear case says that Dell is woefully behind Apple (Nasdaq: AAPL ) and Android peers such as HTC and Samsung in creating devices that matter. Consider the Streak tablets. An initial version had decent features but was too small to matter. A $200 (after a two-year contract) seven-inch version debuted in February with T-Mobile as a partner, and was met with less-than-enthusiastic reviews from the tech cognoscenti.
"After a week of testing, I found the compromises Dell made to get to that low price make it impossible for me to recommend the Streak 7. Its screen, battery life, and software are all disappointing, and vastly inferior not only to the iPad's, but also to those on the Samsung Galaxy Tab," wrote The Wall Street Journal's Walter Mossberg.
Dell has good reason to go after Apple's iOS Empire. Unlike PC peer Hewlett-Packard (NYSE: HPQ ) , desktops and mobile devices account for more than half of revenue. A hit tablet or smartphone could create a windfall and lift Dell's depressed share price.
Let me be clear what this means. By "hit," I mean anything that even resembles a legitimate alternative to the iPhone or iPad -- something akin to the Xoom or Galaxy in tablets, and the BlackBerry or Droid in smartphones. Dell doesn't need a monster seller. It just needs something that sells consistently, which brings us to the bull case and Dell's depressed value.
Investors just don't like this stock, valuing it as if CEO Michael Dell and his team have no chance of ever restoring growth. Like the hollowed-out hull of a shipwreck, Fools see Dell and assume what once was can never be again.
"Dell just hangs on as consumers are less than enthusiastic about incremental technological improvements. They are well positioned with a wide range of products and state of the art manufacturing facilities and processes, costs are well controlled, but there just isn't a lot of discretionary income fueling demand. Sales are mostly need based, not impulse buys," wrote All-Star investor Jeffreyw in October.
There's merit to this complaint. Look around your office. How many of your co-workers are adopting their own tech gadgets for work? How many are using iPhones they bought? iPads? IT departments no longer hand out gear and expect consumers to adapt; consumers tell IT what they're using and force the techies to make good.
But don't take my word for it. Consider Gmail. Tens of millions of consumers took to Google's (Nasdaq: GOOG ) cloudy mail system before anyone had ever heard of Google Apps. Now, hundreds of millions use Gmail corporately and elsewhere.
And yet there's no doubting Dell is cheap by some metrics. On the basis of price-to-earnings, Dell trades for 9 times next's year's earnings estimate and 11 times last year's performance. Both are low compared with historical standards.
Dell is also flush with cash and gushes free cash flow. Factor in these twin traits and the stock's value could jump to $23 a share versus the $15.40 it was trading for as of yesterday's close. Bargain hunters such as fellow Chris Baines argue that gap won't last. Value investing's long and storied success as a wealth-creating discipline suggests they're right.
Institutional ownership history
|Southeastern Asset Management||146,600,284||137,458,334||145,155,871||145,155,871|
|State Street Global Advisors||70,815,110||65,217,212||65,200,414||65,200,414|
|The Vanguard Group||56,760,398||59,844,435||62,113,670||62,113,670|
|TOP 25 TOTAL||622,745,417||756,866,878||885,802,346||885,802,346|
Source: Capital IQ, a division of Standard & Poor's. *Indicates the number of shares owned.
Big Money investors tend to have a value bias, so it's unsurprising to see them betting on Dell. They've bought shares at a consistently high rate since 2008, though their buying accelerated in last year's fourth quarter. The top 25 institutions purchased more than 56 million shares from October to December, with AllianceBernstein's funds accounting for more than half of the increase.
Among mutual fund managers, Vanguard's famed Windsor (VWNDX) fund -- managed for three decades by the legendary John Neff -- upped its stake in Dell by 73% in the fourth quarter. Though only a three-star fund, Windsor has outperformed the S&P 500 and the category average over the past one- and three-year periods.
Competitor and peer checkup
|IBM (NYSE: IBM )||60.96%||0.09%|
Source: Capital IQ. Data current as of March 7.
Finally, in terms of ownership profile, Dell is by far the most attractive stock in this table. Institutions own plenty but so do insiders. Investors betting on a buyout can be assured that Michael Dell, who still owns 13.6% of the business, wouldn't sell to the first bidder or for an outrageously cheap price. Why would he? It's in his direct financial interest to make Dell as valuable as possible.
Even so, I can't recommend investors buy Dell at current prices, unless you have the capital to also buy shares of Apple. The Mac maker is also cheap, yet remains the brand leader in tech's two most important markets right now: smartphones and tablets. I'd rather own a leader than a laggard when both are undervalued.
But if you're lucky enough to be able to afford both stocks, buy both. Holding Dell till it reaches $23-$24 a share could net you a nice short-term gain. Holding Apple for the decade ahead will net you a lot more. Either way, you win.
And in the meantime, keep tabs on Dell by adding the stock to the My Watchlist tool, our free, personalized stock tracking service.