The Day Ahead: A Raft of Hard Lessons

 | May 17, 2013 | 8:00 AM EDT
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I truly don't care about Dell (DELL) as a company or as an investment -- never have, never will. Maybe that's because I'm not infatuated with tech coverage (and banks) with only a handful of exceptions. The core personal-computer industry is a boring read no matter the trade magazine; semiconductor earnings calls are bewildering; and, honestly, how many angles can one take on this battle over a sleepy, low-margin (and eroding) PC company like Dell?

Still, I have to admit that this war has mildly turned me on -- enough to highlight a few key pearls of wisdoms that investors could apply to more exciting companies.

1. When a company with dismal future financial prospects receives a respectable bid from a consortium, embrace the certainty of receiving cash today. Yes, a sweeter deal may arise, but don't become a pig. Five years down the line, a company in the Dell mold will likely be worth 90% less than Dell's May 16 closing price. Carl Icahn and his crew, with a $12-per-share offer and a stub in the company, may in fact be lowballing shareholders in order to profit from any upside in the business in the years ahead. Why? Their actions would drain Dell's cash pile and hurt the company's competiveness in certain sectors (i.e., the cloud) as expenses are slashed.

2. Dell is profitable, but it's the direction of sales and profits that matter -- and when a company moves forward its reporting date out of the blue after producing quarter after quarter of financial dread, it's a red flag.

3. Sometimes it's best to deal with the facts in front of your face, as opposed to doing rampant dot-connecting. Dell's recent annual report clearly stated its prospects were weak, but the market believed the commentary had been rigged to garner support for the bid of founder and CEO Michael Dell. You could see from Dell's lame quarter that the 10-K filing spoke truth.

4. Any old-school tech company without a mobile strategy -- for instance, Dell -- is knocking on death's door. The fact is that this company has no traction in mobile whatsoever, and it's becoming more irrelevant by the day. Microsoft treads the line on this.

A Peek at Retailers

Clearly reality has come home to roost at the almighty Wal-Mart (WMT). First, it will be hard to reach full-year earnings guidance thanks to heightened global investments and e-commerce -- which will destroy margins in the short term -- as well as a renewed focus on corporate responsibility. Massive global price investments are also a large consideration. 

Second, the average Wal-Mart consumer continues to battle with a pronounced paycheck cycle and is still living paycheck to paycheck -- something not captured in headline jobs numbers, even as it's reflected in weak wage growth. Bottom line here: Food and gas deflation have not yet caused the Wal-Mart shopper to spend more during each trip. Wal-Mart CEO Mike Duke was indeed too bullish on the company's spending prospects for the holiday quarter. You can't make a quarter in just the last two weeks.

Investing Lesson: This is a boring company with pressured margins and returns, as well as quietly disappearing total cash -- with more than a 10% drop since 2009 -- yet the shares have handily outperformed the S&P 500 in the past three months. When something like this happens, one should approach the stock with caution. There is a good chance the shares have risen based on market sentiment (in this case, the reach for yield) rather than on valid fundamental reasons.

Finally, how could we forget J.C. Penney (JCP)? Here is a brief rundown of this company's quarterly loveliness.

• Ron Johnson's CEO math: In the first quarter, $752 million in cash was used from operations vs. capital expenditures of $214 million. Imagine if he were still at the helm. He appears to have been blinded by strategy.

• J.C. Penney is making vendors wait for payments? Payable rose a good bit.

• Look at this company's gross margin, and it'll give you a taste of what more promotions will do. Remember, if you invest in price to drive renewed customer traffic, it'll come at a cost.

Investing Lesson: Sometimes, when a company is undergoing a massive turnaround, the stock will gain ground on hopium. It's your job to identify that first, and then decipher if there is any credibility behind the market's claims.

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