A few trades

Taking advantage of the weak market last week I decided to make a few purchases with the personal portfolio. They are mostly unloved value ideas, companies which I think will re-rate heavily once the current bout of extreme risk aversion passes.

A good example is Dell. This company faces a number of issues right now. Aside from the obvious macroeconomic senstitivity (sales of PCs go down in a recession), the most pressing issue is the threat posed to the "direct" business model by lower cost asian suppliers and the secular shift away from PCs towards notebooks, the latter being less suited to a direct sales approach.

As a result of all these issues the shares have been hammered - down around 70% from their peak last year. They now cost $8.4, which is a multiple of around 6.4X last year's earnings. Clearly, next year's earnings will be lower, but people are not going to stop buying computers altogether. And the PC market will recover, even if 2009 is a shocker. There is every reason to think that this company will participate in a recovery, even if its future returns on capital are lower than the outsized ones it earned in prior years. What is even more bizarre is the net cash position of the company. At the last reported balance sheet date the company had over $3 per share in net cash, which brings the p/e valuation even lower once it is stripped out. For sure the company will use this cash to buy up other businesses (it wont be returned to shareholders). Perhaps these acquisitions will all prove to be value destructive, but it certainly seems as though these shares have a lot of bad news priced in already.