Dell News (Nasdaq: DELL) Ahead of EPS

By The Greek:

Dell (Nasdaq: DELL) reports its earnings news tonight. Often times here at "The Greek," we discuss the art of investing. Well, today I came across a good example of a possible point of interest, where the "art" of investing could prove as important to profit creation as the "science" of it.

Article interests (AMEX: DIA, SPY, SDS, DOG, QLD), (Nasdaq: AAPL, DELL, HPQ, QQQQ), (NYSE: NYX)

Running around the office here on the Upper East, we caught an interesting analyst interview on Bloomberg radio. Unfortunately, I did not catch the analyst's name or firm name (feel free to update me with that). However, we found the content of his discussion interesting and enlightening, and more importantly actionable.

Now, I must qualify my statement here, by noting that I have not been following the Dell story for a good year now. So, I was unaware of some of the important notes the analyst made. I should also note that the analyst has a buy rating on DELL, and so he has reason to hope for the shares to rise today and tomorrow. But, it's also within this reasoning that we find our own reason to pay attention.

The Art of Investing

Having been an analyst, but more importantly, having witnessed the tendencies of the average analyst (actually the majority), I can make observations regarding analyst actions. For an analyst to come out and take part in a highly public interview just hours ahead of a company's earnings report is not a common event. It's usually in the hours before these make-or-break moments that analysts pull out the bottle of Jack hidden in their bottom drawer (not really), or otherwise keep their head low and hope the Director of Research forgets about their position or the report itself. Of course, if the news fits his outlook, he would be in that same Director's office within minutes to let him know of the favorable result, OR hiding in a bathroom stall until the Director leaves for home otherwise.

Now, there would be a couple instances when an analyst might otherwise take the interview. First, he could be a proven success who can bear a hit or two, and cherishes the publicity. Secondly, he could be possessed by blind bravado or otherwise naive. Thirdly, he might not receive calls for interviews often, and it being two days before the Labor Day holiday, all the other analysts at major firms may already be stationed at their satellite offices in the Hamptons, making him the only guy available for Bloomberg to call. Also, if there ever was a time to take a chance, it would be two days ahead of the long weekend in late August (around lunchtime mind you), when hardly anybody is paying attention, especially to a radio interview that is not archived and hard to track down after the few minutes of its occurrence.

"In life, the guys who play it safe, keep their jobs and collect a pension some day, but the guys who take chances, they create things and they make a difference."

The Other Scenario - Guts and Conviction

During my time at Mickey Mouse Inc., I was well-known for making gutsy calls and making them right. Oh, over the seven years of taking chances, I was wrong once or twice (actually three times, and I can cite each of them for you). I made gutsy calls because I had confidence in the due diligence I had put into each of my recommendations. And, I just plain had guts, something a lot guys could use a bit of. In life, the guys who play it safe keep their jobs and collect a pension, but the guys who take chances, they create things and they make a difference. I view life as a one-time opportunity, and I've never been one to play it safe.

The other scenario here is that this analyst really believes in DELL. He noted that his call has already proven successful (having initiated it some 5 points ago), and a lot of times this is just the reinforcement a man needs to speak his mind. But, the context of his interview also spoke for DELL, and my mind is an analytical one. What I mean is, I'm not easy to convince.

I often interviewed CEOs who were certain I was going to start their stock with a sell recommendation, only to see I recommended the shares upon initiation. You have to play devil's advocate as an analyst, and that left a lot of CEOs sweating. Not really, because I was always some young kid to them who they were sure knew very little; they never sweat a drop unless the interview was over the phone.

Anyway, I suspect this analyst really believed in DELL, and a lot. He pointed out a catalyst that the market is already aware of with DELL, margin expansion. He noted some $70 the company is saving on one product by restructuring its supply chain and process, and the much more significant improvement to gross margin on that product. He noted that Dell was in process of doing this across the company, and that the shares' improvement from their nascent bottom probably did not reflect that change yet.

Now, at this point, I would study the numbers a bit, and I would never buy the stock until after I had done that. I've found that my own judgment is usually much more important to the success of my decisions than that of any other analyst. But, given that we're close to market close, I'll leave that to you. The shares are down 1.8% today, after a rise yesterday. Whether you buy into the DELL story depends on your own conviction. But, at least pay attention to the economics detailed in the report, and if the financials are seriously benefiting and economic value is being created, then, also after making sure that there would not be a major impact to product reliability from the restructuring of process, then consider DELL. I'll take a closer look after the report, and let you know how I feel about the shares over the longer-term.


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