Value Days at Dell Look Like They're Already Over

Don't expect much high-fiving among value fund managers after Dell's(DELL) big run-up yesterday because it seems the buy-and-hold bargain-hunters have come and gone.

The Dell File

Business: Maker and direct seller of computer systems

Thursday Closing Price: $25.19

52-Week Range: $16.25 to $56.89

Percentage change since Jan. 1: 44.8%

Market Cap: $57,398

Price/Earnings Multiple: 26

Source: Morningstar and Baseline/Thomson Financial.

The PC shop's shares rose 13.5% on Thursday when company executives told analysts that they still think they'll be able to hit their previously lowered guess at first-quarter earnings. They also refrained from providing any guidance for how much they might earn in the second half of the year, but the stock still popped on the Nasdaq Composite's third-best day ever in terms of percentage gains.

Many folks are assuming this is good news for value funds, because anecdotal evidence pointed to the price-conscious types buying battered PC stocks over the past few months. In fact, it looks like they did, but many sold them after the stocks jumped in January when the Philadelphia Stock Exchange Computer Box Makers Index rose 28.9%, according to Baseline/Thomson Financial.

"I actually bought Dell at the end of the year when it got down to $17 or $18. I thought there was a value case there, but now I'm out of Dell. I'm gone. I left at around $26," says Tim Quinlisk manager of three value funds at John Hancock, including the $1.7 billion (TAGRX)John Hancock Large Cap Value fund.

It looks he's not the only value manager who dumped the PC pack in the first quarter. Comparing the percentage of big-cap value funds that own shares of the major PC players over the past few months reveals a consistent pattern: Value managers ratcheted up their PC exposure during past year, but by the end of February many were gone -- odd for a bunch that typically prides itself on investing for the long term.

Values No More Percentage of large-cap value funds invested in the top boxmakers
PC Shop	Jan. 1, 2000	Jan. 1, 2001	Feb. 28, 2001
Dell(DELL)	6.8	15	8
IBM(IBM)	57.3	61	57.1
Compaq(CPQ)	25.1	44.8	29.3
Apple Computer(AAPL)	14	17.4	12.2
Hewlett-Packard(HWP)	41.6	46.8	44.6
Gateway(GTW)	0	10.5	3.5
Source: Morningstar. Holdings as of most recent portfolio reports.

The strategy made a lot of sense, because value managers typically comb the market for companies with predictable if unspectacular earnings growth and a ravaged stock relative to the market or their peers -- a fair description recently of the PC pack. The business has become increasingly cyclical and commoditized with firms essentially competing on price, a similar dynamic to other industries on value managers' radar screens.

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"This is interesting because it sure as hell seems logical that they'd be looking at them," says Pat Dorsey, director of stock analysis at Chicago stock and fund tracking shop Morningstar. "I think Dell has a lot of the things value managers look for. It's been around. It's in a mature area of the tech sector, so its dynamics are understandable. You don't have to use the word 'space' to talk about this business."

Like the rest of the tech sector, PC stocks have taken a vicious beating over the last year. The Box Makers Index has lost nearly half its value over the past 12 months, compared to a 26.7% fall for the S&P 500. PC stocks like Hewlett Packard(HWP), IBM(IBM) and Compaq(CPQ) saw their valuations come down to match the S&P 500's, though Dell is pricier than its peers.

Down but Not Out PC makers have suffered recently with the rest of the tech sector, but have started to rebound this year

Source: Baseline/Thomson Financial. Returns through April 4.

Indeed, value managers did snap up shares of PC stocks. We've talked about Legg Mason value maven Bill Miller's taste for Dell and Gateway shares. And last month Greg Jackson of Chicago value shop Harris Associates told us he's been sniffing around PC stocks this year. But the sector's bump this year -- the Box Makers Index is only down 2.7% since Jan. 1 compared to a 33% fall for the Nasdaq -- has apparently sent some value fund managers elsewhere.

Their motivation is certainly somewhat valuation-driven, since the stock may have run fairly high on the absence of bad news, rather than the presence of good news.

"It's hard for me to make a value case for Dell at these levels. They didn't really say things were rosy and they didn't give any guidance for the back half of the year," says Quinlisk.

Quinlisk is shifting his focus to chip stocks, including Texas Instruments (TXN) and LSI Logic(LSI), looking for shops that make chips for cell phones and other communications devices and not strictly PCs.

At the same time, growth managers haven't exactly been abandoning Dell. The percentage of big-cap growth funds owning Dell has held steady at about 40% since the start of last year. Growth managers are racier than their value types, paying higher valuations and swinging for the fences.

Many probably have a soft spot for Dell, which has averaged an annual 82% gain over the past five years, according to Morningstar. That beats the S&P 500, the goal of every fund manager, by more than 68 percentage points.

Back in the Black After a lousy 1999, Dell has started to return to its winning ways.

Source: Morningstar. Returns through April 5.

Given the dearth of good news anywhere in tech these days, and the gains that many value managers apparently booked from PC shares early this year, maybe those value managers should be high-fiving each other after all.

(See Thomas Lepri's story on Dell's sucesss as a commoditizer.)

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