Let's Talk Tech

James is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

With the rise of smart phones and tablets, traditional laptops and desktops have seen some rough times.  Some pundits have even boldly predicted the demise of these now seemingly antiquated machines.  As a result, there have been quite a few market giants that have been taken to the woodshed.  Here we'll examine two of those companies to determine if there is a long term value play.  Also, in the special bonus discussion section at the end we'll talk about some peripheral plays that have potential.

A successful long term value investor knows that short term dips provide the best entry points for a long term hold.  That is why I personally subscribe to a five year minimum buy and hold calender. However, I use short term (one year) technical analysis to determine my entry points in order to maximize buying power and give an element of safety.  I must confess to loving earnings misses, bad news, or any sort of drama that produce large price drops.

It's rare that I find two stocks that catch my attention in this regard.  But that could be the case here only because the bad news isn't just confined to a particular stock, but rather effects a whole industry.

Dell (NASDAQ: DELL) has been the recipient of a good old fashioned beat down.  Dell is currently trading at $10.95 (Figure 1), down 40% from its 52 week high of $18.36.

Figure 1:

<img src="/media/images/user_14634/dell-1-year-chart-ii_large.png" />

 

With a 40% drop Dell has become one of the most attractive stocks I've examined in quite a while, provided there is a future in the laptop and desktop world.  As I type on my new laptop that I purchased 4 days ago I'm going out on a limb here and will say that the death of the PC has been greatly exaggerated.  So let's take a closer look and I'll explain why I added Dell to my CAPS account on Dec. 3 and am considering a real money purchase.

Here are a few important facts I'd like to share:

-The downtrend in the stock was broken by my favorite bottom indicator, the cup and handle formation.  

-Solid yield of 2.90% that comes only at the expense of a 5% payout ratio. This leaves plenty of room for dividend increases. It doesn't hurt that the CEO, Michael Dell, is a huge shareholder, with approximately 243 million shares.

-Five Year PEG ratio of 1.06, a P/E of 7.40, and a Forward P/E of 6.50.  For the first time analysts are predicting growth in the coming year compared to the three previous years of negative sentiment and downgrades.  This gives me the impression that Dell may have bottomed.

-Solid value in a sector that is normally expensive.  The 5 year low on Dell's P/E was a 7.00, and recall Dell's P/E is currently 7.40.  The company has a book value of 1.87 vs. an industry average of 6.71.  Finally, even taking into account the recent downturn, Dell's 5 year return on investment is still a hefty 27.30% vs an industry average of 26.80%.

While the tablets and smart phones have made an impact, increasing PC turnover from 4 to 5 years, Dell's future doesn't look to be in question, nor does its profitability.   The stock appears to have bottomed, looking at both the one year charts and according to analysts predictions.  Now might be a good time to look at Dell for a long term play.  Conclusion: Buy and Hold. 

Hewlett-Packard (NYSE: HPQ) is a company that is going to require a bit of time to manage the sweeping reorganization that new CEO Meg Whitman has undertaken.  I will admit that to being skeptical when Whitman was selected as the new CEO.  She had led tech companies to greatness, there is no doubt about that fact.  However, her track record for complete turnarounds in mega cap tech companies was non-existent.  Well, shame on me.  Whitman has proven to be focused, tough, and determined.

Remember that new laptop I referenced above?  Well Meg, you're welcome.  When I went shopping, HP was officially the winner for my needs.

Looking at the financials there are still many things I don't like about HP's books, but I'm expecting all that to change over the next two quarters.  While Meg has indicated that the current changes will require years to fully implement ,I firmly believe that we'll begin seeing results over the course of 2013. In fact I'll go one step further and forecast solid earnings for FY 2013 at approximately $3.75 per share.  This would give us a Forward P/E of 4.35.

Applying the industry average P/E of 17.5 to my earnings forecast for FY 2013, we arrive at a price of $65.00.  That seems highly optimistic by any measure, since HP will long carry the stigma of a recovering company.  So I found some struggling but profitable companies and averaged out the P/E for a realistic 7.5.  Applying that to the earnings projections gives us a far more believable $28.00.  I'm looking for this as my 52 week price target.

Looking at a one year chart of HP (Figure 2) we can observe the same kind of downtrend being broken by a cup and handle formation.

Figure 2:

<img src="/media/images/user_14634/hpq-1-year-chart-ii_large.png" />

 

If you are a believer in Meg Whitman, the future of PC's, and the future of HP, then there might not be a better time to jump in for the long run.  But this play involves a bit of speculation.  The positive numbers have yet to materialize and the future could still hold some more surprises.  Conclusion: Speculative Buy and Hold.

BONUS DISCUSSION:

Intel (NASDAQ: INTC) is a major supplier for laptops and desktops.  They have largely fallen behind in mobile chip development.  However, they hope to change all that with the introduction of the Atom.  This processor is touted to be faster, more efficient, eco-friendly, and lighter than the competition.  The Atom could be in a position to challenge top manufacturers like Samsung and Qualcomm.  The second generation is of course already in the works.

In the meantime, as with Dell and HP, their stock price has seen a very large drop (Figure 3) based on their poor positioning in mobile and the perceived demise of the PC market.

Figure 3:

<img src="/media/images/user_14634/intc-1-year-chart_large.png" />

 

If you were paying attention to the above charts it should be pretty obvious where I'm going with this last one on Intel.  Look for future articles regarding Intel and my thoughts on owning the stock.


Lulupoopsalot has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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