"Whenever you find yourself on the side of the majority, it is time to pause and reflect." - Mark Twain
There has been a lot of talk stating certain old tech firms are dead money. I have been one of the culprits myself, noting the decline of the PC. Nevertheless, considering Twain's shrewd advice, I think it is time to pause and reflect on the situation.
Goldman Sachs seems to have done so and decided Dell (DELL) may have taken too much of a beating. Goldman reported that they have upgraded Dell to a "Buy" recently. The firm actually upgraded DELL from a "Sell" to a "Buy" which is somewhat unprecedented and increased the price target from $9 to $13. This price target suggests an approximately 20% increase over the stock's current price of $10.47. Goldman Sachs noted,
"Our bullish view is based on three key factors: 1) while PC demand remains depressed, we believe the secular bear case has become consensus and we could begin to see sentiment and expectations tilt positively in 2013; 2) consensus expectations for Dell's FY2014 (CY2013) are down 28% from peak and we believe this reset has produced a positive risk/reward for the stock; 3) Dell's net cash balance provides some downside buffer as it produces opportunity for an LBO or levered recap under the right conditions, though our analysis suggests an LBO would still be challenging at this point."
Basically Goldman is suggesting we should go against the crowd. The crowd is betting Dell is going down so they say it is going up. Furthermore, they feel Dell's expectations have been set so low that the risk is minimal they will not beat the reduced estimates. I have selected Dell and four other tech stocks that may be in the same boat to review and see if they actually are buying opportunities at these levels.
In the following sections, we will perform a review of the fundamental and technical state of each company followed by an analysis of any underlying catalysts for the stocks. The following table depicts summary statistics and Thursday's performance for the stocks. The following charts are provided by Finviz.com.
Cisco Systems, Inc. (CSCO)
The company is trading 7% below its 52 week high and has 11% potential upside based on the consensus mean target price of $21.761 for the company. Cisco was trading Thursday at $19.49, up almost 2% for the day.
Fundamentally, CSCO looks solid. The forward P/E ratio is 8.09. Cisco's quarter over quarter EPS and sales growth rates are 5% and 20%, respectively. Cisco's net profit margin is 17.90%. Cisco has a dividend with a yield of 2.92%. The company is trading at 12 times free cash flow.
Technically, Cisco is all over the map but has remanded in an uptrend as of late. On a positive note the stock did break out to the upside and complete the golden cross. The stock just achieved the golden cross which is bullish.
I posit the need for security improvements as the growth of people transacting on their mobile devices will soon outweigh the impact of an economic downturn. I do believe the tide is turning for Cisco and therefore Cisco is a long-term buying opportunity. Cisco's issues are transitory, but I would wait for a better entry point. Let the stock cool off some.
DELL is trading 42% below its 52 week high and has 12% potential upside based on a consensus mean target price of $11.68 for the company. DELL was trading Thursday for $10.49, up over 1% for the day.
DELL fundamentals are mixed. The company has a forward PE of 6.21. DELL is trading only 5.75 times free cash flow. Dell's ROE is 27.66%. The company pays a dividend with a 3.09% yield. On the other hand, EPS next year is expected to only rise by 2%. Sales and EPS are down quarter over quarter and the company's net profit margin is a measly 5%.
Technically, DELL has just broken out of a long term downtrend, no doubt on the Goldman upgrade. The stock powered through resistance at the 20-day and 50-day smas. This is a good sign, yet time will tell if it can pull off a trend reversal.
Dell is in the midst of reinventing itself into a corporate server and services firm because the days of the traditional PC are numbered. A new corporate mindset of "Bring your own device" is hastening Dell's demise. I'd say it may be good for a trade, but I would not consider it a long-term investment at this point. They have more work to do. Avoid the stock for now.
Hewlett-Packard Company (HPQ)
HPQ is trading 53% below its 52 week high and 35 above its consensus mean target price of $13.37 for the company. HPQ was trading Thursday for $13.83, flat for the day.
HPQ fundamentals are mixed. HPQ is trading for 4.64 times free cash flow. The company has a forward PE of 3.88. HPQ pays a dividend with a nearly 4% yield. On the other hand, EPS for the next five years is expected to only rise by 2%. Sales and EPS are down quarter over quarter and the company is not turning a profit.
Technically, HPQ is still in a well-defined downtrend. Nonetheless, the company seems to be exhibiting some strength in sympathy with the recent Dell upgrade by Goldman.
The PC market appears to be dying on the vine. This is bad news for HPQ. They are in the midst of a reinvention and turnaround program that will surely take lots of time and money to pull off. Couple this with Meg Whitman's propensity to under promise and under deliver and you have a recipe for further downside. Avoid this stock. I would not even attempt this as a short term trade.
Intel Corporation (INTC)
Intel is trading 30% below its 52 week high and has 16% potential upside based on a consensus mean target price of $23.47 for the company. Intel was trading Thursday for $20.16, up almost 2% for the day.
Intel's fundamentals are mixed. The company has a forward PE of 10.13. Intel's ROE is 24.94%. The company's net profit margin is 22%. The company pays a dividend with a 4.53% yield. On the other hand, EPS next year is expected to drop by 7%. Moreover, sales and EPS are down quarter over quarter.
Technically, Intel is in a well-defined downtrend. All the major moving averages are sloping downward. Nevertheless, the stock may have found a bottom at 20. A mini double bottom reversal pattern is nearly being fulfilled.
I don't see Intel doubling in value anytime soon, but this would be a solid core holding for an income investor at this level with the nearly 5% yield. I say it's a buy at this level if it fits your suitability requirements.
Microsoft Corporation (MSFT)
Microsoft is trading 17% below its 52 week high and has 32% potential upside based on a consensus mean target price of $35.19 for the company. Microsoft was trading Thursday for $26.73, up slightly for the day.
Microsoft fundamentals are mixed. The company has a forward PE of 8.23. Microsoft is trading only 10 times free cash flow. Microsoft's ROE is 24.50%. The company pays a dividend with a nearly 4% yield. The company's net profit margin is 22%. On the other hand, EPS next year is expected to only rise by 12%. Sales and EPS are down quarter over quarter.
Technically, Microsoft has gapped down significantly and is currently trading for 8% above its 52 week lows. The stock is the definition of a falling knife. The stock is in a downtrend currently. All the major moving averages are sloping downward.
Microsoft is pulling out all the stops to keep itself in the game. The reception of the Windows 8 based phones seems to be a success. I see Microsoft in much the same boat as Intel. I don't see it doubling anytime soon, yet don't see it dropping significantly from here. If you are looking for a solid company for a long-term income investment Microsoft fits the bill. If you are looking for growth, keep on looking.
The Bottom Line
All the stocks on this list are in the process of reinventing themselves. If I was to pick one that I believed had the potential to rise from the ashes it would be Cisco. The proliferation of smartphones and other mobile devices should be a major profit driver for the company. HPQ and Dell have a much harder row to hoe and I would avoid them. Microsoft and Intel are cash cows that produce a healthy yield with somewhat muted risk. I see these as value investments for income investors. Nonetheless, do your own due diligence and layer in to any position to reduce risk.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: This is not an endorsement to buy or sell securities. Investing in securities carries with it very high risks. The information contained within this article for informational purposes only and is subject to change at any time. Do your own due diligence and consult with a licensed professional before making any investment.