In Silver's Shadow, Dell Pops

04/28/2011 4:00 pm EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

While most of the media and investor attention is focused elsewhere, the unfashionable tech supplier's dirt-cheap stock is starting to run, writes Senior Editor Igor Greenwald.

I know I’m supposed to write about silver today, and what its rise portends as far as hyperinflation and the coming apocalypse. Silver is the Royal Wedding of online financial journalism—the hot topic that gets most of the clicks.

So here’s the scoop on the super-relevant and well-nigh-irresistible iShares Silver Trust (SLV): it’s going up real fast, and will eventually come crashing back down.

Might take some months or even years, though. The latecomers to the party have only just begun yelling bubble, so there’s plenty of ingrained skepticism to overcome. (Not to mention surprising ignorance about the metal’s many uses.)

The smart money is massively short silver, as witnessed by the fact that SLV was reportedly deemed “hard to borrow” by Goldman Sachs, meaning their hedge-fund clients are looking at the same chart spike as everyone else and sniffing a shorting opportunity.

And if this was just smart money versus mom-and-pop day traders, as Jim Cramer and our own Howard Gold suggest, I’d give the hedge funds solid odds, despite their recent track record.

But this is also hedge funds versus a couple of billion moms and pops in China and India. Those countries are “struggling” with inflationary booms—and now that the dollar is passé, the Asian multitudes have come to see precious metals as a better store of value than their own inflating currencies.

China is actually encouraging this mindset, because every yuan spent on gold and silver is a yuan not spent bidding up corn or condos.

Does this mean the silver market won’t correct? Of course it will, at some point—clearly it’s overdue for a letdown. But I’m wary of arguments based on popular enthusiasm and the price action alone, as these are the essential ingredients of every bull market.

On the heels of the tech bubble, the housing bubble, and the fear bubble, it’s easy to forget that powerful moves such as silver has seen this year can herald some pretty long-lasting trends. Unless your timing is exquisite, selling into strength and buying weakness is a mug’s game, even if the mug belongs to a Goldman client.

But the truth is that silver, with its 58% gain so far this year, is not the most exciting opportunity on my radar.

The honor belongs to Dell (DELL), which—despite the absence of any news—is breaking out toward a new 52-week high. For a good summary of fundamental factors in Dell’s favor, check out this recent excerpt from Jon Markman.

As Markman points out, the stock’s dirt cheap, trading at seven times the current year’s earnings estimates, if you back out the $4.38 per share in net cash.

Michael Dell bought more than 10 million shares on the open market last month, when it corrected to a little over $14 in the wake of the disaster in Japan. He bought another 7 million-plus shares in December, when they traded around $13.

Even if the founder is simply speculating, he’s certainly speculating on a solid trend.

How solid? The rising 50-day moving average is now pulling away from the recovering 200-day moving average, and the widely tracked 20-day exponential has just bounced off the 50-day support. Dell doesn’t report earnings until May 17, but here’s what that report is likely to confirm:

  • That contrary to widespread market fears, the iPad has not killed the laptop. Witness Intel’s (INTC) surprisingly strong report, and the subsequent, ongoing breakout by its stock.
  • That Dell’s focus on big business customers places it squarely in the sweet spot of the current boom in corporate IT spending, even if the margins it commands pale next to Hewlett-Packard’s (HPQ) much less Oracle’s (ORCL) or IBM’s (IBM). The point here is that Dell is transforming itself into a technology-services company—and while that will take time, it remains priced like a mere PC supplier.
  • That Michael Dell’s mama raised no fool.
  • That the cheap, unpopular turnaround plays make the most attractive buys right now.

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