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By hartmanbirge
July 21, 2006

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OK I'm going to TRY this tinyurl.com craze.... It has not escaped my attention on what seems to be transpiring in some corners of the business universe. Today's victim � none other than the king of supply chains � Dell Computer. And apparently Dell is soon to join our friend Wal-Mart by hitting new five year lows on its share price...but I think there seems to be a key difference... Dell has had to do serious price cuts and their earnings seem to have suffered some real damage (estimate was .32 and it's going to come in at .23)... pooooF!!! There goes $7 billion in market cap at today's opening.... Is it a buy? Believe me there will be many who go piling in.

http://tinyurl.com/j9ym2

And this performance follows yesterdays Crushing results in Yahoo....

http://tinyurl.com/nwohl

Are either of these two the sort of hit to a stock that gives one a buying opportunity? I've seen more than one value investor piling into Dell.... I remember more than a few newsletters pounding their fist on the proverbial table when Dell was $35.00... today it's going to open less than $19. All of these price moves and ensuing portfolio damage aren't anything to fret in and of themselves...so long as the underlying business is intact. If the price drops in a great business then we buy more - simple. And here's where it gets interesting; I think that the growth scenarios as proffered in these two above companies did an awful lot of assuming... And the DCF models that relied on those growth assumptions are now being ratcheted downward.

It seems to me that Google is just creaming Yahoo and that the Google business model allows the company to make more money per search than Yahoo and that Google is going to gain an awful lot of share unless that dynamic changes.... But how am I to know how durable Google's advantage really is? Just last year Yahoo looked to be in a fairly strong position... And what of Dell? Is it REALLY a buy? From what I've heard, consumer demand has really dropped off � which has hit Dell and Intel, to name two. How strong were those "moats?" Did they really have moats at all? Short term blip, long term trend, or permanent damage? As we all know, it doesn't always make sense to go rushing in to a fallen company... In most cases, the fundamental business must remain intact and that's what determines whether one continues to buy as it drops or to sell the stock.

And if I look at these two above and compare to Wal-Mart, which has greatly increased its business the past five years, then it's an easy choice. One has a five-year low and has greatly expanded its business and at least to me is a buy � (WMT)... and the other is at a five year low and seems to be in the kind of trouble where analytically determining the future is dodgy at best. Of those two � WMT and Dell... Which has the best chance five to ten years from now to be selling at a far higher valuation? Which of those two businesses is going to look better in five years? What are the odds that it happens? Does the thesis REQUIRE a good economy? A bad economy? Or is it more foolproof? Which of those two is most likely to have permanently destroyed capital? And I think this sort of query goes right to the heart of how Buffett measures risk (permanent loss of capital)... In any case, these are the sorts of questions that make it fun....

HB


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