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Dell Tumbles in Turbulent Market Following Analyst Warning

Analysts are questioning if investors, caught up in the market selloff, are overreacting to the warning.
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Shares of


fell sharply Tuesday after an analyst at

Merrill Lynch

warned that lower gross margins for the company's fourth quarter could cut into Dell's earnings.

The analyst, Steve Fortuna, said in a research report that although Dell was well-positioned for long-term growth, the current quarter "still lacks clarity" in terms of quarterly results.

Dell's stock was down 3 3/16, or 6%, to 47 11/16 in early afternoon trading. (Dell ended Tuesday down 4 3/16, or 8%, to 46 5/8.)

But some other analysts questioned whether investors, caught up in Tuesday's market selloff, were overreacting to the views of Fortuna, who rates Dell's stock a hold.

"As far as the Merrill Lynch report is concerned, it's stating the obvious -- that the quarter is a challenge," said Charles Wolf, an analyst at

Warburg Dillon Read

, who rates the stock a buy. His firm has done no recent underwriting for Dell.

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Wolf attributes Tuesday's fall in share price to a plunge in the broader


market. "If you're not following the company, it's hysterical news, and to the analyst community, it's almost so what," he said.

A simple glance inside the last quarter's financial statement under the heading "gross margins" confirms Dell's own caution about this situation.

In his report, Fortuna also said the recent run-up in Dell's stock occurred for "no apparent reason." Dell investors got early stocking stuffers when Dell's stock price rose 28% from Dec. 14 to Dec. 23.

Wolf disagrees. "The whole Nasdaq market ran up to highs and Dell is an important component of that market."

Fortuna had not returned calls for comment by early Tuesday afternoon.

Dell, based in Round Rock, Tex., has reported lower gross margins as a result of an "aggressive pricing strategy," according to its quarterly financial filings.

Fortuna wrote that the company had either to be less aggressive on pricing to increase profitability and sacrifice some sales, or to maintain the current pricing strategy and risk falling short of consensus earnings expectations.

Consensus expectation for the fourth quarter is 21 cents as surveyed by

First Call/Thomson Financial


"In a flat market, the news would have taken only a quarter off the price," Wolf said.