Editor's note: This story was originally published earlier on Aug. 12, and has been updated to correct an error.
In light of the negative reaction to
poor quarterly showing, it's worth revisiting the stock, to see just how vulnerable it is now. But the profiles of three other computer manufacturers show that Dell's fall in the well today shouldn't be too disastrous for the sector.
First, let's look at what the market reacted to. Dell's second-quarter EPS was in line with consensus analyst expectations, at 38 cents, but sales missed. Sales for the quarter were $13.4 billion, higher than the same quarter last year but short of the expected $13.7 billion. The company expects third-quarter sales of $14.1 billion to $14.5 billion and EPS of 39 cents to 41 cents. The Street anticipated that Dell would offer third-quarter EPS guidance of 41 cents on sales of $14.6 billion. This soft guidance is what prompted the negative market reaction.
In the earnings preview I filed
Wednesday, Dell had an overall unfavorable weekly chart profile going into the earnings report and also was 4.4% undervalued. With this type of profile, the stock became vulnerable in the event of an earnings disappointment, which proved to be the case. The stock needed a weekly close above its five-week modified moving average at $40.05 to confirm upside leadership potential. Now that seems highly unlikely, given the negative reaction to its quarterly results. Dell is currently below my monthly pivot at $38.94, and that means the stock could begin to trend toward its 52-week low of $32.70.
What's interesting about Dell is that shares gapped higher three months ago on a positive reaction to earnings. At that time, there was a price gap from the May 12 high of $37.10 and the May 13 low of $37.75, and the upside from that positive trend reached a high of $41.99 on July 20 vs. my semiannual risky level at $41.12, meaning that a major upside objective had been achieved. So far this morning, Dell shares are below the May price gap, which makes that zone strong chart resistance.
It's interesting to note that the reaction from brokerage research departments has not been as negative as the market's reactions. To me that's surprising, and it should be considered a warning on just how much weight an investor should put on Wall Street research. Among the reiterations on Dell:
- UBS maintained a buy rating but cut its price target to $48.
Prudential maintained its overweight high-risk rating.
Raymond James maintained its outperform rating.
Smith Barney maintained a buy and a medium-risk rating and reduced 2007 and 2008 EPS estimates from $1.88 and $2.20 to $1.81 and $2.10.
Lehman Brothers says weakness is a buy.
Goldman Sachs downgraded the stock from outperform to in-line.
Collateral Damage Will Be Limited
Other PC makers shouldn't be too damaged by Dell's selloff. A look at the chart profile for each shows why.
is currently 5.9% overvalued with fair value at $41.53, and it has a positive weekly chart profile. This is a much better screen than what we saw when I first profiled the stock on
March 1. Back then, the stock was around 77.9% overvalued, trading near $44.50. After declining more than 20% into April and May, Apple held my annual value level of $34.22 and was 12.4% undervalued. With the success of the iPod and its positive halo effect on sales of Apple computers, Apple can hold up better than Dell on weakness. I view Apple's current fair value level of $41.53 as support, but shares should have difficulty rising above my monthly risky level of $45.38.
Fellow PC maker
also has a positive weekly chart profile, but the chart profile shows that the stock is also overbought. My overbought reading is a 12x3 weekly slow stochastic, which is above 80 on a scale of zero to 100. Also 13.9% undervalued, the stock's fair value is $28.08. A close today below the five-week modified moving average at $24 would shift the weekly chart profile to negative, indicating that H-P would follow Dell's lead and decline. A cautious stance is merited here, because my model shows a monthly risky level at $24.54. A weekly close below my annual pivot at $23.56 indicates risk to my quarterly value level at $22.02. My model thus suggests that, like Apple, H-P should hold up better than Dell.
situation is still worth examining in relation to this group, even though the company has diversified away from making PCs. The stock is currently 19.7% undervalued, making fair value $102.97, and it has a positive weekly chart profile. I do not expect IBM to trade up to its fair value this month, because there's a monthly risky level at $83.54. And if there's a market correction, IBM could decline to my monthly value level at $76.65, as IBM should be less correlated to the Dell effect.
As originally published, this story contained an error. Please see
Corrections and Clarifications.
Richard Suttmeier is president of Global Market Consultants, Ltd., chief market strategist for Joseph Stevens & Co., a full service brokerage firm located in Lower Manhattan, and the author of
newsletter. At the time of publication, he had no positions in any of the securities mentioned in this column, but holdings can change at any time. Early in his career, Suttmeier became the first U.S. Treasury Bond Trader at Bache. He later began the government bond division at L. F. Rothschild. Suttmeier went on to form Global Market Consultants as an independent third-party research provider, producing reports covering the technicals of the U.S. capital markets. He also has been U.S. Treasury Strategist for Smith Barney and chief financial strategist for William R. Hough. Suttmeier holds a bachelor's degree from the Georgia Institute of Technology and a master's degree from Polytechnic University. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback --
to send him an email.