Posted on May 30, 2008
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We were thrilled to see some short-term upside on Dell last night post the strong results. It is still a multi-quarter story but positive reinforcement is a good thing.
What puzzles us is how inept some of the large firms still are at helping people make money in stocks. Dell is a very large, well covered firm. It was impossible not to see tremendous value in the shares at $19 given their franchise and huge cash flow. With an influx of new management and some clear evidence that fundamentals were steady and getting better there were plenty of reasons to believe the company would get back on track. Add to that a huge share buyback and the inevitability of eventual easy compares and you have a perfect set up to make money on a one year view in a very large liquid stock.
At one level we’re happy to see the lack of thoughtful analysis because it means it’s easier for our fund to make profits on stocks that are supposed to be well-covered. But still as a recovering DoR I can’t help but scratch my head when I see the upgrade today from Merrill.
To miss the chance a lower prices before the turn isn’t that big of a sin. We’d all like to have perfect timing but know that’s impossible. The real crime isn’t upgrading the stock today when it is likely to open at $23-24 but it’s putting a $27 price target on it. Who is reviewing the research product? It’s easy to do a long-term valuation and come up with a very conservative current fair value of $30-34 on Dell. If you don’t use a discount you can stay quite reasonably that the stock could be trading at $40 in 12-18 months. That’s what you do when you are upgrading after a $19 to $24 move and want to get back in the game.
If you don’t believe it then you keep your hold, provide your arguments and have some clarity of message and intellectual integrity. Maybe ML still uses one of those bogus systems where the price used as the "upgrade price" would be yesterday’s close. It’s obviously fraudulent since the real price where will be where the stock opens this morning but in the past this technique has been used to publish great performance figures on research analysts that nobody can remember ever making them any money.
– Kris Tuttle
[R2 Capital remains long shares of Dell.]
Tags: Dell, Wall Street, Research, Merrill Lynch
Posted on May 29, 2008
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Dell has been an important position for us for the last several months. Unfortunately it has also been a large losing position albeit our only one YTD.
The fundamentals on Dell have been improving all though most analysts are impatient for immediate results. Most of the positive data points on Dell server shipments are probably priced into the stock going into the report. The shares have been trading up and we’ve seen industry data from IDC and brokerage reports citing Dell strength in the market.
In the last few months there have also been signs of better expense control which could help make the quarterly report a more positive event than the last one.
Our expectation is that the recover of Dell will still require another several quarters to play out. There are some major opportunities for upside but we ran our long-term valuation analysis today to arrive at a near-term fair value estimate of $30-34 on the stock. It’s a bit above most of the price targets we have seen which hover around the high $20’s.
From a PM standpoint we had a little extra exposure on when the stock was down at $19. We have taken that off but maintain a full position into the report though we have no idea what the numbers and the call may hold. The Street has been fairly unfriendly to Dell of late so our expectations are fairly low.
Our confidence in stock is based on improving fundamentals, a reengaged management team and most of all outstanding returns on invested capital.
– Kris Tuttle
[R2 Capital currently has a long position in DELL.]
Tags: Dell, Earnings, Valuation
Posted on May 26, 2008
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During a recent client briefing by our friends at GaveKal there were a few comments and observations that struck us as interesting:
1. The US is the Saudi Arabia of food. Higher average prices are good for the country while hurting many others.
2. Emerging economies are feeling quite a bit of pain already. Small ones like Vietnam have been visibly hurt and larger ones like India are beginning to show the strain.
3. The earthquake in China is a game-changing event. There may be as many as five to ten million homeless. The onset of the rainy season and snow melt will bring added flooding in the valleys. The containment of inflation will no longer be a priority for a government that needs to rebuild ten millions homes. Closed mines and factories that were below even Chinese standards for safety and emissions are being put back into service.
4. The increase in Asian consumption is still a 10 year trade.
5. Two major investment opportunities that should benefit from a return to mean valuation levels are Japan and technology stocks. Japan may be on the verge of a trend of upward revisions. It’s also very interest to consider the massive R&D investment (22%) Japan has made relative to their (10%) market capitalization. The US also compares well on this metric.
6. Spending on technology, information and communication is benefiting from nearly all levels of spending increases, from emerging economies to more personal digital content to increased business investments in technology platforms.
7. There appears to be a large carry trade in operation that is shorting the USD to buy Crude. Obviously on a momentum basis it’s been working well. However the unwinding could be volatile depending on how crowded the trade becomes.
8. It turns out the financial crisis is the factor behind recent spikes in commodity prices, especially food. The natural sellers, farmers, have been taken out of the market because banks that routinely financed their futures transactions no longer will do so. This leaves the markets to function purely on speculation and in the absence of most real sellers.
9. The long-CDS trade has worked out to some extent but lessons learned from the recent collapse of Bear Stearns call the merits of the trade into question. If the CDS is a sort of insurance policy that is cheap to buy but then does pay off even when the suspected event happens, does it makes sense to own them as investments? Bear may only be one case but would the ECB take similar steps to bail out a faltering Italy or Greece?
[Please note these are just scattered comments. Any merit should be attributed to GaveKal and any errors or omissions are our own.]
– Kris Tuttle
Tags: China, Macro, Oil, Japan, Tech, Investing
Posted on May 7, 2008
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We already had SUNW in our "irrelevant" category of technology companies so we weren’t disappointed with recent results.
What does surprise us a bit is why people continue to be "surprised" when Sun misses numbers.
The last time we checked on them was in December of 2006 when their CFO Mike Lehman spent some time telling investors about their plans.
In our post on it at the time we noted that despite all their stated goals we saw "too many senior smart guys in love with all their projects and not able to be ruthless about making the hard choices."
At the time the stock traded at $22/share versus the current $13. One can only hope that readers of this blog that sent in angry mail and comments defending Sun management saw the light sometime during 2007 when it was still possible to find bids in the $20’s.
We acknowledge that Sun is still a large powerful company that delivers some great products. The only thing they are lacking is a market position and a strategy to make money for investors.
Today we can conclude the same way we did a year and a half ago:
"Investors are still unclear regarding what Sun’s role will be in the enterprise and how their strategy translates into sustainable improvements in growth and margins."
Now back to work on stocks in the relevant category….
– Kris Tuttle
[Research 2.0 has no positions long or short in SUNW at the time of this writing.]
Tags: Sun Microsystems, SUNW, TechStocks
Posted on May 1, 2008
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We did start the post on SYMC yesterday by stating we had no idea what the quarterly report would hold. Investors were happy with posted results and guidance. From our perspective it only makes the potential downside more acute if they company does nothing to improve their steady performance decline in customer environments. Even though we don’t play for the quarterly reports we still focus on them to compare and contrast them with our longer-term thesis.
The company started the report by reclassifying a large number of business segments to present a different view of the business to the market. (Why would you do this in a fiscal Q4 versus at the beginning of the next fiscal year?) In any case we’ve lived in company environments like Symantec where "results" often depend more on presentation than execution. This was the case at IBM during the years they tried to ignore the substantial declines in their business in the twilight of the 80’s.
The full transcript is available here to skim. As one can see lots of the statements and answers are either obscure or self-serving. There are plenty of references to "double-digit" growth and "our <fill in the blank> business is doing great" along with repeated references to the "record" quarter. Management even gets away with a revisionist positioning of saying they have now posted five straight quarters of stronger than expected results despite lowing guidance with the September 2007 quarter.
Clearly international was strong for the company. We were more than a bit surprised that nobody had much of a reaction to the fact that 6 points of the 13% YoY growth was driven by foreign exchange. Unless we misunderstood the statement it appears that the entire growth in deferred revenue came from currency effects. Leading analysts actually said that the growth in deferred revenue was strong. Are they even listening to the information being presented?
That said we don’t find fault with the report per se. The company has a strong mix of businesses and recent acquisitions like Vontu are indeed best-of-breed point products. At the same time nothing has changed in terms of our thesis on the company and the stock. Management will be driving the field force to deliver more growth in license revenue this year at a time that existing customers are increasingly dissatisfied with Symantec and expect very little to no spending increases with them. It could be a very interesting year for the company and investors. To the degree that international business and currency benefits remain strong, the fundamental weakness will be masked.
Based on the quarter and the guidance we would expect the presentations on the analyst and investor day on June 12th to be another powerful marketing event which will help stoke enthusiasm for what looks like a turnaround.
We main focused on execution which we continue to see as bad enough to jeopardize business results in the next few quarters. Management closed their call stating that F09 is going to be "their year."
– Kris Tuttle