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We think that beaten-up Dell (NASDAQ:DELL) shares may be a profitable turnaround investment – a classic Contrarian play. With the long anticipated release of Microsoft (NASDAQ:MSFT) Windows Vista a reality and Michael Dell taking charge as CEO, it looks as those these two catalysts may return Dell’s share price to better days.

Change in Direction

Dell’s share price (Dell, $23) is currently trading 44% below its five year high. Increased competition from Hewlett-Packard (NYSE:HPQ) and Lenovo is one reason. Slowing PC sales growth is another. Negative press is a third. But there are two positive catalysts that should help Dell shine again.

After six long years, Microsoft’s (MSFT) new Vista Operating system is finally here. This will likely mean that consumers and businesses will need to upgrade their PC’s to take advantage of Vista’s power. As the digital revolution continues, people will demand more from their PCs – Media Center, Personal Video Recording, Video On Demand to name a few. This coming upgrade cycle should be good business for Dell.

The second catalyst is Michael Dell returning as CEO. This should bring renewed energy and focus to the company which has recently floundered.

Vital Few versus the Trivial Many

The Trivial Many are the masses that follow the crowd and let emotion guide their decision making process. Members of this herd include Wall Street analysts, journalists, and lemming-like investors. In contrast, the Vital Few are the real doers – the ones that consistently beat the markets by going against the crowd instead of just expressing their opinions.
The vast majority of the Trivial Many are bearish on Dell. What are the Vital Few doing? They are buying Dell!

A good source of information is www.gurufocus.com, which tracks the holdings of Gurus like Warren Buffett and David Dreman. Currently a whopping eleven Gurus hold Dell – a good indicator of where the smart money is going. If the Vital Few are buying Dell, they likely know something that the herd doesn’t.

Valuation Matters

The Contrarian Investing Association (www.contrarian-investing.com) recommended Dell as a stock to study with an exit target price of $32. The Association focuses on out of favor stocks trading below their intrinsic value.

The intrinsic value of Dell is likely far greater than its current market value. The broker independent Morningstar analysts give Dell a fair value estimate of $34. In their analysis, Dell trades more than 30% below its intrinsic value. Smart contrarian investors buy the right company at the right price.

Looking at the numbers, Dell is a free cash flow machine. With 9 billion dollars of cash on its balance sheet, it generates about 4 billion dollars of free-cash-flow a year. If cash is king, Dell certainly wears a crown.

“Dude”, we like Dell.

DELL 1-yr chart
dell

Disclosure: The author's firm currently advises Dell to its members as a Stock to Study.

Source: Dell Is A Contrarian Dream