A Dell Dilemma

 | Dec 04, 2012 | 10:00 AM EST  | Comments
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Shares of Dell (DELL) jumped 4% Monday after Goldman Sachs analyst Bill Shope upgraded the computer maker to Buy from Sell, with a $13 price target. Shope outlined three catalysts for the stock: things can only get better, upside to lowered earnings expectations and the long-shot possibility of a leveraged buyout by founder Michael Dell.

Jim Cramer speculated on Monday that the Goldman analyst must know something the rest of the investment community doesn't. After all, why would he stick his neck out if he didn't know something?

Here's another possibility: hedge fund bottom feeding. The tech sector, as measured by the S&P 500, was brutally beaten down this quarter. The sector fell about 6.3%, although overall, the tech sector is still up 13% this year. Many hedge funds have been bottom feeding in the tech sector, especially among the names that have been beaten down the most. Hedge funds have been after Yahoo! (YHOO), Facebook (FB), Research In Motion (RIMM), Zynga (ZNGA) and Groupon (GRPN).

The brokerage community is all too happy to oblige hedge funds by publishing several generic upgrades designed to goose the stocks of near dead companies in order to generate some commission action.

With Dell trading nearly 6x 2014 estimates, how wrong can you be? Maybe next year will be better. Maybe next year's estimates are too low. Maybe Dell is undervalued and poised for a bounce.

At all the investor conferences I've been to, Dell's management has acknowledged the PC business stinks and has outlined a goal of moving more heavily into the enterprise and cloud services (the so-called "New Dell.") But even management thinks it will take another three years until it can transition away from PCs.

There are other risks, too. Maintenance, which is about 30% of revenue, has been a bright spot. According to a Barclays analysis, if maintenance revenue falls at the same rate as PCs, Dell could lose 7% of its total earnings and compound the company's problems.

To me, this is a dead cat bounce that has been artificially created by the hedge funds and the broker-dealer community to goose the stock and create a little excitement around year-end. After year-end, don't hang around too long, because this Christmas goose will get plucked.

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