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PCs Languish, but Dell Leaps Ahead

The problem is that the PC business has become what the skeptics of the 1990s forecast: cyclical. This means there will be prosperous years and lousy years. For investors, that means you need to buy on troughs and sell on crests. PCs have become much like the automobile industry, which is a replacement business. You don't buy a new PC anymore because you are tantalized by its awesome new speed or graphics capabilities, but because you need one for some reason.

Bret Rekas, a Minneapolis-based hedge fund manager specializing in technology stocks, said he has a five-year-old laptop on his desk running Windows 2000. Sure, it's old, he said. But the father of new twins said that if he's going to drop $2,000 on something, it will be on a vacation for him and his wife -- not a thinner, slightly faster computer.

The Replacement Cycle Works

What draws Rekas and his ilk back to PCs? The replacement cycle. Gartner analyst George Shiffler says the buildup of older PCs in the installed base at homes and businesses around the country is exerting strong pressure. They weren't built to last forever. The operating system made by Microsoft (MSFT - Get Report) wears down, and the machines slow to a crawl. They will be replaced because they start acting like old clunker cars. It's one thing if they don't look like much, but when they don't work well anymore even to surf the Web, it's time to pony up for a new model -- particularly one with an awesome new graphics card.

Most PCs are bought by companies, however, and the bosses have been stingy. U.S. corporations have built up a huge cash hoard in the past couple of years, probably anticipating another major economic turndown akin to the ones that afflicted the country amid the oil shock of the mid-1970s, or the mild recessions of 1990, 1994 and 2001.

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