Dell Is Anything but a Bargain

The last cycle is history. Get over it. Trying to resurrect one of yesterday's glory stocks is not going to be a winning strategy for investors. The new cycle is upon us, and in case you haven't noticed, the winners are nontech, small- and mid-caps.

With so many compelling value opportunities in the market, investors should avoid the overvalued, risky stock of Dell(DELL Quote). Yes, Dell has a wonderful build-to-order business model and lots of girth to throw around in the rough-and-tumble PC market. Include a terrific management team and a leading market position and it should be a slam-dunk buy.

But my column is not about buying business models, girth, management or market position. It's about value, baby. It's about determining if a stock is a bargain relative to the value of its underlying business.

Here are just a handful of reasons why smart money is avoiding Dell and why it is anything but a bargain:

Excess capacity: Thanks to ample capital flows in the last cycle, every PC company that I review is unusually well-capitalized. Unlike prior cycles in other industries, I don't see weak companies going out of business because of a lack of capital.

The price war continues: Eventually the winners will be sorted out in the current price war, and Dell is sure to be one of the survivors, but while you wait there are better investment alternatives elsewhere.

Metrics suggest overvaluation: Given the level of profitability, with net margins of about 6%, this $31 billion revenue stream does not justify a market cap of $68 billion to $70 billion. By my calculations, Dell needs 3 1/2 years of 20% revenue growth to justify the current quote.

Institutional distribution: Money flows are leaving big-cap growth and going into small- and mid-cap value. To the extent that Dell rallies, look for substantial, aggressive selling pressure to bring the stock back down.

Price efficiency: With about 40 analysts hovering at Dell's door, don't expect to gain any kind of competitive edge with this equity. You can find a number of terrific undiscovered values beneath Wall Street's radar screen, but you won't find one at Dell.