Dell Upgrade: Every Dog Has Its Day

Shares of Dell (NASDAQ:DELL) closed higher on Monday after an analyst from Goldman Sachs (NYSE:GS) upgraded the struggling computer maker, citing too much pessimism in the industry. However, investors should still be cautious about chasing a position.

How High Can Dell Climb?

Goldman analyst Bill Shope raised his rating on Dell to Buy from Sell, while also increasing his price target on shares to $13 from $9. Although he is not oblivious to the headwinds facing the traditional PC market, Shope believes the negativity levels are too high.

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In a client note, he explains, “While we expect companies more exposed to traditional PCs like Dell will face continued pressure, we believe that expectations have become too bearish and imply an overly draconian outlook for the computer market.” Shares of Dell are down about 30 percent year-to-date, but Shope sees potential for value. He continues, “Dell has become an attractive deep value play and we would be buyers of the stock.”

The X-Factor in the Note

Shope recognizes that a leveraged buyout of Dell would be tough given the company’s $18 billion market capitalization, but does not place it outside the realm of possibility. He writes, “Potential involvement by CEO and founder Michael Dell, who already owns 14 percent of Dell shares, makes it difficult to completely dismiss a leveraged buyout transaction entirely.”

At the end of the third quarter, Dell reported a cash position of about $11 billion, offset with only $5.3 billion in long-term debt. This strong net cash position also provides Dell with opportunities. “Dell has the option to take advantage of its healthy balance sheet for strategic purposes, something that other net debt hardware names do not have in their favor,” Shope said.

Despite the upgrade, the current trend does not look good for Dell…

CHEAT SHEET Analysis: Trends Do Not Support the Industry in which Dell Operates 

One of the core components of our CHEAT SHEET Investing Framework explains that companies riding macro trends tend to outperform those which don’t. Think of the investing proverb, “Arising tide raises all boats,” Dell shares surged 4.4 percent on the upbeat note from Goldman, providing the company’s biggest one-day gain of the year. However, it has been a downward spiral for Dell and other traditional PC companies. As the chart below shows, “old-tech” companies like Dell and Hewlett-Packard (NYSE:HPQ) have failed to keep pace with “new-tech” firms such as Apple (NASDAQ:AAPL), Amazon.com (NASDAQ:AMZN) and Google (NASDAQ:GOOG) over the past year.

Furthermore, the PC industry has yet to show any signs of stabilization. Gartner, a leading information technology research company, recently announced that worldwide PC shipments decline 8.3 percent in the third quarter, representing the largest drop for the industry since at least 2001. Last month, Dell also predicted a fourth straight quarter of declining sales. It expects fourth quarter revenue to come in between $14 billion and $14.4 billion, less than the $14.5 billion average estimate on Wall Street.

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