Dell: Merrill Gets Low Marks for Effort

We were thrilled to see some short-term upside on Dell (DELL) Thursday night post the strong results.  It is still a multi-quarter story but positive reinforcement is a good thing.

What puzzles us is how inept some of the large firms still are at helping people make money in stocks. Dell is a very large, well covered firm. It was impossible not to see tremendous value in the shares at $19 given their franchise and huge cash flow. With an influx of new management and some clear evidence that fundamentals were steady and getting better, there were plenty of reasons to believe the company would get back on track. Add to that a huge share buyback and the inevitability of eventual easy compares and you have a perfect set up to make money on a one year view in a very large liquid stock.

At one level we’re happy to see the lack of thoughtful analysis because it means it’s easier for our fund to make profits on stocks that are supposed to be well-covered. But still, as a recovering DoR, I couldn’t help but scratch my head when I saw the upgrade Friday from Merrill.

To miss the chance of lower prices before the turn isn’t that big of a sin. We’d all like to have perfect timing but know that’s impossible. The real crime wasn’t upgrading the stock Friday when it was likely to open at $23-24, but it was putting a $27 price target on it. Who is reviewing the research product? It’s easy to do a long-term valuation and come up with a very conservative current fair value of $30-34 on Dell. If you don’t use a discount, you can say quite reasonably that the stock could be trading at $40 in 12-18 months. That’s what you do when you are upgrading after a $19 to $24 move and want to get back in the game.

If you don’t believe it, then you keep your hold, provide your arguments and have some clarity of message and intellectual integrity. Maybe ML still uses one of those bogus systems where the price used as the "upgrade price" would be Thursday’s close. It’s obviously fraudulent since the real price was where the stock opened Friday morning but in the past this technique has been used to publish great performance figures on research analysts that nobody can remember ever making them any money.

Disclosure: R2 Capital remains long shares of Dell.

Comments

[Garry]

Right on. I've always wondered how a brokerage could recommend a stock at a given price, see the stock cut in half, and then reduce their recommendation to hold or sell. ML's had their share of sub prime too, making this blunder pale in comparison.

Good article. Wonder how they keep their clients happy.