The recent bounce has drawn attention to the stock and an article [subscription required] in today's edition of The Wall Street Journal delves into Dell, saying the company has lost its status as the top world-wide personal-computer maker but then offers an upbeat perspective. The company is putting less focus on market share and giving more attention to buoying profits. The article notes that some analysts are positive on the stock but aren't anticipating the stock will surge higher. What really caught my eye though was the end, where it points out that some analysts remain skeptical.
The subdued expectations from the bulls and the outright skepticism from some bears fits with a theme I have been watching develop over the last few months. The shares gapped to a new annual low on the July earnings warning but the stock failed to see follow-though on the gap and quickly bounced back. Could that have been the beginning of a bottoming process for the stock?
Before you decide, consider a piece of data about analyst ratings. According to Zacks, eight of 22 analysts (36%) rank the stock with a "buy" rating. This is a relatively low percentage, especially when you consider that in December 2004, when the shares peaked, the percent as "buys" stood at 79%. Some might interpret that as a sign that the Street is in the process of capitulating. Contrarians, like myself, consider this an encouraging factor for the stock.
Now, before you accuse me of thinking I am smarter than everyone on the Street, which I assure you is definitely not the case, simply consider this in terms of supply and demand. If everyone already loves a stock, that means a steady stream of new money will need to find its way to the stock in order to fuel a rally. The fact that many are watching the stock but still sitting on the fence (the "hold" ratings) suggests that they could be enticed back into the stock and offer upgrades. The upgrades then have the potential to pull money in both from the clients of the brokerage houses and also from those watching the news and seeing the upgrades. In other words, I use this to help gauge sentiment and potential buying demand.
Nick Perry is an analyst with Schaeffer's Investment Research.
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