Month: February 2013 (Page 5)

How many ways can I say, “Take the offer and run?”

I will admit that my analysis tools are not well refined for determining the price of a company that is as poorly managed as DELL [stckqut]DELL[/stckqut]. I have developed my tools to try and deduce an appropriate price for truly well-run companies. Since I never invest in poorly-run companies, I never wanted to spend much time in fine-tuning those rules.

I currently think that Dell Inc. is over-valued at its current price. I wouldn’t buy the stock at this level and I would accept Mr. Dell’s offer if I owned any of the stock (which I do not). I understand that there is hidden and untapped value in the company however that value is only going to be unlocked in a private setting. Trying to make Dell Inc. a well-run company after it has floundered for so long is virtually impossible. Mr. Dell and his partners are likely to change many facets of the company that would be very painful in the public market of quarterly announcements. This is very necessary as the stock would likely be hammered during all of the changes.

So while I understand various institutional investors wanting to get a bit higher return, the average individual investor should take the money and run. If the institutional investors get too greedy then Mr. Dell’s buy-out may not work and then the stock price will almost certainly drop.

There are better companies to invest in then Dell Inc. Even if the company was well-run (which it isn’t), I wouldn’t hold the stock above about $9.40. Mr. Dell is offering $13.65 for the stock. Somehow, Southeastern Asset Management says the company is worth $24 per share. I don’t see the company hitting that price as a public company any time soon. If they really think the company is worth that much then they should do the leveraged buyout and show how great they are at managing!

Since my tools for poorly-run companies are not well-defined, I may be undervaluing the stock. In that case, I could see $13.65 as a reasonable premium. I cannot see the price being justified too much above that.

For your enjoyment, here is a recent report on the company:

Dell Inc. ($DELL) Confident Investor Rating: Poor

MANAGEMENT EXECUTION

ANALYSIS

The following company description is from Google Finance: http://www.google.com/finance?q=dell

Dell, Inc. (Dell) is a global information technology company that offers its customers a range of solutions and services delivered directly by Dell and through other distribution channels. Dell is a holding company that conducts its business worldwide through its subsidiaries. The Company operates in four segments: Large Enterprise, Public, Small and Medium Business, and Consumer. Its Large Enterprise customers include global and national corporate businesses. Its Public customers, which include educational institutions, government, health care, and law enforcement agencies, operate in their own communities. Its SMB segment is focused on helping small and medium-sized businesses by offering products, services, and solutions. Its Consumer segment is focused on delivering technology experience of entertainment, mobility, gaming, and design. In April 2012, it acquired Clerity Solutions. In September 2012, it acquired Quest Software Inc. In December 2012, it acquired Credant Technologies.

Confident Investor comments: At this price and at this time, I do not think that a Confident Investor can confidently invest in this stock.

If you would like to understand how to evaluate companies like I do on this site, please read my book, The Confident Investor.

If you have read this site for long, read my book, The Confident Investor, or even followed me on Twitter then you have quickly learned that I don’t recommend mutual funds to most investors. I feel that an investor can do better by having 20-40% of the portfolio in Index Funds (or Index ETFs) and then the balance in high quality stocks such as the ones on my Watch List.  I further suggest that you build your net worth in those great stocks by using my GOPM methodology (Grow on Other People’s Money). It is the easiest and most effective way that I have found at increasing the size of your portfolio.

However, I frequently am asked by new investors about mutual funds and how they work. So I thought a short explanation was relevant. If you are an experienced investor then I am sorry if this article is too basic for you – please pass it along to a new investor that you may be mentoring.

A mutual fund is a professionally-managed pool of money that invests in some combination of stocks, bonds, or cash for the benefit of the mutual fund investors. In a mutual fund, you share the increases or decreases in the value of the fund. You do not officially own a share of the fund, such as in a company, but the distinction is irrelevant for an individual investor.

A mutual fund spreads your investment dollars around better than you might be able to do by yourself. This diversification tends to reduce your risk of losing money as well as making money. Diversification usually results in less sudden changes in value, as when some investments are doing poorly, others may be doing well. The reverse is true as well, when one mutual fund holding is doing well it will be tempered by other poor performers in the fund.

A mutual fund’s investment managers are trained to look for the best possible returns that are consistent with the fund’s strategies and goals. You can almost take it for granted that your mutual fund investment will provide you with the services of a professional money manager. You are in effect betting that the manager will make competent decisions for your investment dollar. In the majority of cases, he is hired or fired on the basis of the whims of the investment firm for which he works. He is rarely subject to customer reviews. It is very seldom the case that you can vote for him being fired, as you could potentially do with the CEO of one of your companies.

Combining your money with other investors creates collective buying power. As a group, mutual fund investors can buy a wide selection of investments. So, rather than just buy one car manufacturer or one bank, they have the funds to buy into ten companies that are similar. This allows you to take advantage of industry trends without relying of the success of one single company.

The size of a fund can be its downfall if it specializes in just one industry segment. If there are not enough excellent companies, then the manager may have to buy into lower quality companies. This strategy potentially invests in too many sub-par companies. The lowering of standards may lead to reduced returns.

You can learn more about the stock market and, more importantly, how to make money in the stock market by buying my book. You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in ebook formats for Nook, Kindle, and iPad.