Throw This Stock Away

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I'm not much of a morale massager. If egos need to be stroked, they should probably steer clear of this weekly column, where I bash a single stock to bits.

I'm aiming at a company that used to be great. It was so admired a decade ago that companies in non-competing fields would send their finest on recon tours of the company's operations, just to see what made it tick. Times change.

Don't worry. I'm not some mean-spirited meanie. I wouldn't dream of slamming a stock unless I had three suitable replacements to offer you. And I offer a fair trade, I think. Who gets tossed out this week? Come on down, Dell (Nasdaq: DELL).

Dude, you're vetting a Dell
I don't like picking on companies when they're down, but Dell certainly qualifies. Despite the past few months of rallying markets, shares of Dell still fetch just a little more than half of the company's 52-week highs.

It's easy to see why Mr. Market isn't fond of Dell. Revenue and earnings fell last year, and analysts see even sharper declines this fiscal year. One can argue that most IT-based tech stocks are in a similar funk, but that doesn't excuse Dell for its sloppy performance lately.

Where are the catalysts? This isn't necessarily a rhetorical question. There was a time when I felt though the arrival of Microsoft's (Nasdaq: MSFT) Windows 7 would trigger a new upgrade cycle for personal computers, but that's unlikely at this point.

Microsoft is allowing computer users to preorder Windows 7 Home Premium over the next few days for $49, less than half of its eventual retail price, and it's selling briskly. In other words, a growing number of frustrated Vista users -- and those rocking it old-school with XP -- aren't going to bother upgrade to a new PC to get their hands on the new operating system.

Sure enough, despite the Windows 7 buzz, marketing research firm Gartner still predicts a 6% dip in PC shipments this year. Dell's slice of the diminishing pie is also likely to shrink, since it lacks the upmarket proprietary appeal of Apple (Nasdaq: AAPL) and isn't as prominent in the entry-level netbook market as are Asian specialists such as Acer and ASUS.

Another flawed catalyst is the long-rumored Dell smartphone. Dell has a history of fumbling away opportunities in non-PC areas such as portable media players and HDTVs. A telco hat on Dell's head might well look more like a dunce cap. Does Dell stand a chance in a country with tens of millions of BlackBerry and iPhone owners tethered to two-year contracts? Does it really want to fight for scraps of what's left of the market of late adopters who can actually afford the steep monthly smartphone contracts? Whether Dell enters this organically, or whether it tries to make up for lost time by snapping up Palm (Nasdaq: PALM), what's the point?

Sorry, Dell. The catalysts just aren't there.

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.

• Research In Motion (Nasdaq: RIMM): Until it's dethroned, Research In Motion's BlackBerry remains the market-share leader in this country's booming smartphone industry. It tacked on another 3.8 million net new users during its latest quarter; there are now 28.5 million BlackBerry users out there. Research In Motion is also trading at a reasonable 17 times this year's projected profitability, and less than 15 times next year's profit target. Sure, Dell's fetching slightly lower multiples, but Research In Motion is the one actually growing in this tricky climate.
• salesforce.com (NYSE: CRM): If this seems like an odd replacement for Dell, the answer rests in the clouds. One of the reasons to avoid many hardware companies such as Dell -- and even a software company such as Microsoft -- is that cloud computing will make software cheaper and hardware upgrades less necessary. Server-stored applications boils down to rudimentary connectivity, and that's going to keep companies and home users on their existing devices longer. As the poster child for cloud computing, salesforce.com is growing quickly in the enterprise space.
• Apple: If I have to offer up a computer maker, it won't be Hewlett-Packard (NYSE: HPQ), even though I admire the job that CEO Mark Hurd has done in turning the PC and printing giant around. I would have to go back to Apple. It has succeeded where Dell has not, with the iPod. It's also where Dell would love to be, with the iPhone. And Apple is the computer maker with the proprietary operating system to make it stand out in a crowd. That distinction will carry less weight in a cloud computing tomorrow, but it's hearty enough right now to nibble away at Dell's market share.

Other headlines out of the weekly trash can:

• Maybe Dell is a Palm reader after all.
• Is the netbook dead or not?
• The key to investing is to avoid value traps.

Do you like my substitutions? Would you rather stick it out with the tossed company? Are there other stocks Rick should look at in future editions of this column? Let him have it in the comment box below.