Hey, Dude, Is Dell a Sell?

08/19/2008 12:00 am EST

Focus: OPTIONS

Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

Joseph Hargett of Schaeffer’s Investment Research, says a recent favorable magazine story may not make the computer maker a Buy.

After years of success selling utilitarian PCs to the masses, Dell (Nasdaq: DELL) finds itself moving away from mass-produced, monochromatic boxes in a bid to improve its image and sales. The company's move toward more hip product design and customization is the focus of [a recent] Fortune article (“Dell’s Comeback Machine,” August 12th), and the underpinning of Dell executive hopes of returning to the top of the retail PC market. One such redesign of a Dell laptop, code-named "Mini Cooper," prompted the author to quip "I'm used to seeing this kind of design daring from Apple and Sony. But Dell?"

According to Endpoint Technologies CEO Roger Kay, "Dell's laptops probably were stockier than average in the past, so it had more ground to make up… I think these might actually beat some expectations." But Dell is also moving toward a more diverse software offering than the company's prepackaged predecessors, with options including Linux on certain models.

The article ends by detailing a few kinks in the process that need to be worked out before Dell's rainbow of PCs officially hit their stride. Specifically, "engineers are still puzzling over how to get paint to consistently stick to the Latitude's magnesium skin." According to Fortune, "the sooner [the kinks are worked out,] the better for the company's revenue and buzz."

The road to recovery for Dell has certainly been rough, and I'm not entirely convinced that rainbow-colored laptops will solve [its problems] overnight. Still, traders have bid the shares higher by nearly 3% this year, with the stock surging [nearly 40%] since their mid-April nadir.

However, this momentum appears to be less adhesive than the Latitude's puzzling paint, as Dell was halted in its tracks by resistance in the $25.50 region. This is a key technical level for the equity, as it marks former support in August and November 2007. (The stock closed Monday below $25—Editor.)

There is plenty of pessimism among options players for Dell, as the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.99 ranks above 87% of all those taken during the past year. A breach of the 25.50 level on a weekly basis could prompt an unwinding of this negativity.

But Wall Street remains a concern for the security. According to Zacks.com, 13 of the 22 analysts following the shares rate them a Buy or better. If the company's redesigned PCs and laptops fail to pull consumers out of their caves during these hard economic times, we could see downgrades from a brokerage community that may have overestimated the allure of shiny electronics and pretty colors.

Subscribe to the Option Advisor here…

Related Articles on OPTIONS