Q&A: Bond Performance and Valuation Concerns

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Question: I would like your opinion on Dell (DELL - commentary - Cramer's Take). It seems grossly overvalued, but most money managers continue to buy it mindlessly. It is in a commodity business that has excess capacity. What's the attraction other than an attempt to cling to index components?

-- C.S.

Answer: I disagree completely. Dell is a story unto itself. As I've stated in Columnist Conversation posts on more than one occasion, I expect Dell to be a member of the Dow Jones Industrial Average in short order. It is redefining the business segments in which it participates -- to the point of creating new terminology for taking on the competition and crushing it. Some candidates that are in the midst of "getting Dell'ed" include Gateway (GTW - commentary - Cramer's Take), Hewlett-Packard (HPQ - commentary - Cramer's Take) and Sun (SUNW - commentary - Cramer's Take), to name a few.

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Question: I know you've mentioned Paychex (PAYX - commentary - Cramer's Take) in the past as a company you've looked at. There's no doubt that Paychex is a great company, but the price has always troubled me. It seems that at the current quote, Paychex is, at best, fully valued. How overvalued, if at all, do you think it is?

-- J.G.

Answer: I don't think Paychex is overvalued at all. Growth prospects are terrific. Investors who are negative on Paychex are overlooking the impact of recent changes in interest rates. To the extent that rates continue to rise, that drops straight to Paychex's bottom line. The company receives tax withholdings that ultimately go to the government, and that's the float that it invests. Higher rates generate significant income from that float.

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Question: Cisco (CSCO - commentary - Cramer's Take) is typically cited as a bellwether of the broader market, albeit with a higher beta. Do you think Cisco is overvalued, and thus, by extension, is the broader market equally overvalued? Or, because of the beta, is the market overvalued by only half as much?

-- J.S.

Answer: I wouldn't touch Cisco at the current quote. It's painfully overvalued, and expectations for growth are excessive by any measure. The business is worth roughly half of its current market value of $125 billion. Fans of Cisco like to point out the fact that the company has a hoard of cash, but when adjusted for working capital, cash only represents about 10% of the market value (roughly $12 billion to $13 billion).

I don't agree that the broader market is equally overvalued, as you say. I'd say the average stock is around fair value, and a large basket of stocks remain undervalued. I highlighted a couple of such names in my most recent appearance on "Kudlow & Cramer," including Warnaco (WRNC - commentary - Cramer's Take) and Tupperware (TUP - commentary - Cramer's Take).

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Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor and portfolio manager of The Turnaround Fund, a no-load mutual fund. At time of publication, Alsin and/or ACM was long Warnaco and Tupperware, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to [e-mail]. Click here to receive Arne's latest favorite stock picks from his newsletter, The Turnaround Report.