The house rules are simple in this brutal column.
I bash a stock that I think is heading lower. I offset the sting by recommending three stocks as portfolio replacements.
Who gets tossed out this week? Come on down, Dell(DELL +0.00%).
PCs aren't politically correct
It's been nearly four years since Dell was the subject of this column.
The mother of all rallies has taken place in those 45 months. Many tech bellwethers have doubled or tripled in that time, but Dell hasn't gone along for the ride. It was trading in the low teens then. It's trading in the low teens now.
There's plenty of buzz surrounding Dell these days, but it has nothing to do with the struggling PC maker's actual growth prospects. Dell is one of the few tech companies where analysts see revenue declining both this year and again in 2014. Dell has missed the boat on "good enough" computing, and it's not as if even a crash course in tablets and smartphones would ever make Dell as popular as it was when costly desktops and laptops ruled the roost.
No, the Dell buzz these days is all about how it can be gutted.
Founder Michael Dell was hoping to quietly take the company private, putting public shareholders out of their misery. Dell has spent the past few years acquiring companies that will help the company provide end-to-end solutions, and that's just not the kind of vision that plays out to Wall Street's desire for results-driven performance quarter after quarter.
However, Carl Icahn has crashed the party, and he's come with a wrecking ball.
The plan to take the company private in a $24.2 billion deal didn't sit well with Icahn, and he feels that the fallen tech giant could do better than that. Instead of letting Dell try to fix itself behind the curtain of public scrutiny -- which is really the only shot it has at a turnaround -- Icahn wants Dell to take on enough debt to pay a $9 a share dividend.
If Dell's struggling now, just imagine how constrained it will be as a leveraged dinosaur.
The market is mesmerized by Icahn at the moment. Why take $13.65 a share when it can grab a $9 payout in a few months? The stock has shot well past the proposed takeout price, even though one can only imagine how Dell's empire will come undone if it ever did have to shell out that kind of distribution on borrowed money. The interest payments will swallow the thinning profitability until its assets are worth less than its debt.
Poof! You've seen this vanishing act before.
Dell's founder feels that he has a chance to lean on the company's steady server business and acquired enterprise solutions puzzle pieces to build a legitimate company, but now it seems as if greedy shareholders will just watch a gutted Dell bleed to death slowly after culling away a monster dividend.
Some bullish analysts feel that Dell's worth more than the sum of its parts, but this is a depreciating asset. Dell's exit strategy is about to become an exit wound. Ride the circus for now, but make sure you're not one of the last to leave the big tent as it comes down.
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.
- Google (GOOG 0.42%): Four years ago no one could predict that Google's Android would be the mobile platform to beat. "Dell has a history of fumbling away opportunities in non-PC areas such as portable media players and HDTVs," I wrote four summers ago, as Dell smartphone rumors began to surface. "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?" Well, I was wrong. There was room for one more major player, and it was the open-source juggernaut in Android. Dell has rubbed elbows with Google, but it's doomed. If Dell goes private it will be partly bankrolled by a $2 billion loan from Microsoft (MSFT 1.57%). Clearly this is Mr. Softy keeping its fading Windows platform alive with a major hardware partner, though in the end it will only hurt Dell. Either way, Google's the tech darling growing at a double-digit clip.
- Apple (AAPL 2.15%): Betting on Apple isn't very popular these days, but since I was on CNBC last week recommending Apple just minutes after it appeared to have bottomed out at $419, I may as well pound the table again. It's true that Apple's margins will contract from here, but this doesn't mean that Apple will stop growing. Margins will shrink as Apple takes a more competitive slice of the mainstream global market in smartphones and tablets. With Apple's back to the wall, you just know that it's going to introduce at least one new product category this year to renew buzz. Apple now yields 2.5% and trades for less than 10 times earnings. It's a bargain with untapped catalysts that have yet to materialize.
- Cisco (CSCO +0.58%): If you want to bet on a tech turnaround story, check out the router king that was briefly the country's most valuable company before the dot-com bubble popped. Cisco seemed left for dead as business tanked during the global recession and it unloaded its consumer businesses. However, Cisco has turned around in a big way. It's hitting fresh 52-week highs, and its revenue and earnings are growing again. If you're considering Dell on the strength of its server business in this connected world, the smarter bet is to make Cisco your blue chip networking play. At 11 times earnings and packing a reasonable 2.6% yield, the worst is shrinking in Cisco's rearview mirror.
