Does Dell Support Higher Prices?

Dell

With shares of Dell (NASDAQ:DELL) trading around $12, is DELL an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Dell is a global information technology company that offers its customers a range of solutions and services, which are delivered directly by Dell as well as other distribution channels. The company operates in four segments: Large Enterprise, Public, Small and Medium Business, and Consumer. Dell serves a wide range of customers: global and national corporate businesses; educational institutions; government, health care, and law enforcement agencies; small and medium-sized businesses; as well as end users. Through its four segments, Dell is able to provide information technology products to a growing user base around the world. As economies continue to develop, look for a company like Dell to provide important technology products for years to come.

Dell founder Michael Dell and partner Silver Lake Management said they will not raise their $24.4 billion bid for the company. For now, Dell’s bid is up against Carl Icahn and Icahn Enterprises (NYSE:IEP), but analysts are saying the race is too close to call — which offer the board will favor is anyone’s guess. A shareholder vote on Dell’s offer is scheduled for Thursday, but Dell could delay that meeting to drum up support for his bid.

T = Technicals on the Stock Chart are Mixed

Dell stock has been declining over most of the last several years. The stock has seen its fair share of volatility, owing to the recent buyout battle. Analyzing the stock’s price trend and its strength can be done using key simple moving averages.

What are the key moving averages? They are the 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Dell is trading between its rising averages, which signal neutral price action in the near-term.

DELL

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Dell options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Dell Options

49.67%

0%

0%

What does this mean? This means that investors or traders are buying a very minimal amount of call and put options contracts, compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Steep

Average

September Options

Steep

Average

As of today, there is average demand from call buyers or sellers, and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very minimal amount of call and put option contracts, and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates, and what that means for Dell’s stock.

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. The last four quarterly earnings announcement reactions can also help gauge investor sentiment on Dell’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Dell look like, and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

-80.56%

-29.00%

-44.90%

-12.50%

Revenue Growth (Y-O-Y)

-2.41%

-10.71%

-10.70%

-7.50%

Earnings Reaction

-0.22%

0.21%

-7.32%

-5.34%

Dell has seen decreasing earnings and revenue figures over the last four quarters. From these numbers, the markets have not been too happy with Dell’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Dell stock done relative to its peers, Apple (NASDAQ:AAPL), HP (NYSE:HPQ), IBM (NYSE:IBM), and the overall sector?

Dell

Apple

HP

IBM

Sector

Year-to-Date Return

26.38%

-19.17%

85.16%

1.46%

22.47%

Dell has been a relative performance leader, year-to-date.

Conclusion

Dell is an information technology company that offers a variety of products and services to companies and consumers worldwide. A recent buyout battle has put the company in the middle of a tug-of-war game, and its stock has struggled in recent years, trading sideways for most of this year. Over the last four quarters, earnings and revenue figures have been declining, which has produced disappointed investors. Relative to its peers and sector, Dell has been year-to-date performance leader. WAIT AND SEE what Dell does this coming quarter.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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