Dell Is Back on Right Track

03/29/2011 4:40 pm EST

Focus: STOCKS

Jon Markman

Editor, Trader's Advantage

The long-suffering former PC titan has reinvented itself as a business systems and services supplier, writes Jon Markman, editor of Trader's Advantage.

Last month, Dell (DELL) shares jumped more than 10% overnight, emerging from a four-year downtrend after a positive earnings surprise.

For those of you not trading in the 1990s, you only need to know that the Texas tech giant was one of the most amazing stocks of all time to own, trade, watch, think about, obsess over, and mostly make tons and tons of money from.

Its founder and managers were the first to figure out how to mass-produce the most important consumer and business tool ever invented-the personal computer-and reap the bounty.

From January 5, 1990 to December 31, 1999, Dell shares rose 88,750%-enough to turn a $10,000 investment into roughly $8.9 million.

The term "Dellioniare" was coined to describe the yuppie sales and product managers who roared up and down Austin, Texas, streets in their Ferraris. Virtually every quarter presented an opportunity for the average trader anywhere in the world to make a fortune on Dell calls. It was like a dream.

In the 2000s, though, came heartbreak. Every other PC company caught up with Dell, and its managers made one mistake after another as the market matured. In recent years it became a sad shell of its former self-still large, but more fat and dopey than muscular and brilliant.

Fast forward to last month's earnings report. It was a barn-burner, completely blowing apart the markets' skeptical attitude toward this once-great, and perhaps soon-to-be-great-again, goliath.

Dell reported earnings of 53 cents a share after extraordinary items, versus the consensus expectation of 37 cents a share. Sales came in a touch lighter than expected, but margins were incredible: 21.5% vs. the consensus of 18.7% gross margins, and 8.2% operating margins vs. consensus of 6.4%.

These kinds of surprises are what market junkies live for, because they shatter the paradigm of thinking about a company that has reigned, in this case, for half a decade.

Dell has been trying to shrug off the weight of its legacy personal-computer business-a dead-end in the era of the mobile workforce-and reinvent itself as a software, services, and storage specialist.

Pundits have been leery and investors have been skeptical. And yet that is what Dell has apparently managed to do. In a statement, managers guided 2012 earnings and sales up by almost double what the Street expected.

Maybe, just maybe, Dell has come around.

Its founder and executives are proud men and women, and they were so embarrassed by their mistakes of the past that they have put a lot of effort into getting the next phase of their business right.

I would love to see them right the ship and pull an IBM (IBM) here: Yank the stick back, steer out of their long decline, and ascend back to at least where they were in the mid-2000s.

The stock is cheap, management is buying back shares, and they are on the right track with their new focus on services and storage.

Now here's the why the company is gaining ground, and it's important for all of tech-Dell's fourth-quarter recovery manifested a sharp rebound in business spending on technology.

The company said sales to large companies jumped 12%, to $4.7 billion, in the fourth quarter, compared with the same period a year ago. Among small- and medium-sized businesses, sales rose 12%, to $3.7 billion.

Dell continued to struggle with consumers, a division where sales fell 8%, to $3.3 billion. That is a shame because this is the space in which Apple (AAPL) has won big. But Dell has come to recognize it does not have a good touch with consumers, and that is why it is refocusing on business customers.

This is the strategy that IBM pursued when it dumped its consumer-PC division to Lenovo, and it is probably a smart move. Just like people, companies need to recognize that they can't do everything equally well. As the Most Interesting Man in the World says in the Dos Equis commercials, "Find out what you don't do well, and don't do that thing."

My expectation is that Dell can regain its mojo. No one ever thought IBM would get its groove back. No one ever thought Hewlett-Packard (HPQ) would rebound. No one ever thought that Verizon (NYSE:VZ), which hit a new all-time high this week, would either.

Surprises happen. That's what makes this game fun. Dell is not completely out of the woods yet. But it is getting there.

Ding-dong. It's time again for Dell.

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