Eddy Elfenbein alerts us this morning that “last week, Michael Dell bought nearly three million shares of Dell (DELL) at 23.99 a piece. He’s already made a nice profit. The stock is over $25 this morning.”
Bill Cara, meanwhile, criticizes today’s First Albany downgrade.
Dell is opening new production facilities in the emerging markets (China and India). As Dell already has the world’s best manufacturing and delivery model down pat, now it’s going to add cheapest labor plus proximity to most rapidly growing markets.
And First Albany thinks it has the answers here? I don’t think so, but that’s what makes a market.
Sometimes these Wall street analysts just don’t get it. Then again maybe they do, but have other interests to serve.
After the 2006 bear plays itself out, DELL will be one of the FIRST Cara 100 I recommend you buy. On days of extreme market weakness, like today, writing puts as part of a long-term portfolio management strategy is the best thing you can do.
Cara’s point that shifting more production to China and India will both lower costs and move them closer to the largest potential markets is well taken. However, as we have said before, it is no longer clear that the distribution model DELL has “down pat” remains the best. With PC prices as low as they are, it may no longer be more efficient to ship directly to customers.
We will leave it to the reader to weigh these issues and determine whether DELL is a buy today. Given our sense that the market correction will continue, it could easily get cheaper still. And if our belief in the receding long-term valuation wave bears out, large-cap companies like DELL will have to be the ones that lead the way to single-digit P/E multiples. So give, those concerns we agree with Cara’s strategy of writing puts for those who do favor DELL today. For example, you could write an at-the-money $25 strike price option expiring in November and receive about $1.50 per share optioned. This takes you past the volatile October time frame.
The $1.50 premium effectively locks in the first 6 percent of any rally in DELL from today’s prices (though you would lose any upside beyond that.) The put option would not be exercised so you would keep the option premium. If DELL declines in the meantime your effective purchase price will be $23.50, below what Michael Dell paid for his recent purchased. The put would be exercised against you, but if you were willing to buy at $25 you shouldn’t feel to bad about that.