Where Will Dell Go Next?

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.

Dell shareholders are due to vote on founder Michael Dell’s $24.4 billion buyout offer today, but some are expecting the vote to be postponed again as Mr. Dell works to drum up support for his bid. Dell is competing against billionaire Carl Icahn to take the struggling the company private. Dell shareholders are in a predicament: many don’t feel that Dell’s offer is high enough, but they also recognize that the company’s stock could take a major hit the longer the uncertainty lasts.

T = Technicals on the Stock Chart are Mixed

Dell stock has been in a decline over the last few years. The stock has been trading sideways as the buyout war continues. Analyzing the 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 key 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

45.25%

86%

83%

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

Put IV Skew

Call IV Skew

August Options

Flat

Average

September Options

Flat

Average

As of today, there is average demand from call buyers or sellers, and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts, and are leaning neutral to bullish 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. Also, the last four quarterly earnings announcement reactions 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 been disappointed 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 sector?

Dell

Apple

HP

IBM

Sector

Year-to-Date Return

26.48%

-16.86%

82.74%

2.74%

15.73%

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

Conclusion

Dell offers a variety of technology products and services to companies and consumers worldwide. The recent buyout battle has put shareholders of the company in a tough spot. The stock has declined in the last several years, but looks to remain stagnant until the buyout of company is settled. Over the last four quarters, investors in the company have been disappointed, as earnings and revenue figures have decreased. Relative to its peers and sector, Dell has been a year-to-date performance leader. WAIT AND SEE what Dell does this coming quarter.

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