Why I like this play?
1) First I looked at p/e ratio which gives me a good way to compare to the rest of the sector/industry. Dell is currently trading at about a p/e of 13 based on current year estimates of $1.04 per share. Next years estimates are estimated at $1.24 per share, giving Dell a p/e of 11.73. As I have mentioned in previous posts the rule of thumb for tech companies is ~20. For my own margin of safety I like to be under this estimate and I like to set a target based on the company I am looking at. For Dell I think a 15-20 p/e is reasonable. Using the low range of 15 and multiplying that by future estimates of $1.24 you get a price target of $18.6. If it continues to trade at a p/e of 13 with higher earnings that puts a $16.10 target.
2) As the economy recovers, business may finally start to replace older equipment as prospects of the future improve, which bodes well for Dell. Dell has a very strong hold on the business arena. I also think that the personal computer part of the business will do well as people fill more secure through out the year. That being said estimates may be to low.
3) I also like the chart. As you can see on the chart, Dell has traded in a tight range from 14.20-14.80. I am looking for a gap fill to about $16 at which point I will look to take profits. And if it gets here and I don't take it all off I am looking for another move to the $16.5-$17 level where there is another gap to be filled.
What do the probabilities and Greeks look like?
Based on my price targets and where the greeks are currently trading I am looking for a profit target of about $350-$450. To arrive at the profit target take the estimated move from its current price (at $14.5 currently and target at $16, that's $1.50 move) times the Delta times the amount of contracts times 100 ($1.50 x .45 x 5 x 100, Gives you lower estimate). I think you get the picture.
So obviously we can all do the math on P/E ratios and I understand that basic rule of thumbs on P/Es exist for certain industries, my question is, since this is a huge company with many analysts following and lots of institutional ownership, why is it trading so far away from what you might consider a logical P/E? In my opinion this means the market doesn't agree with earnings estimates. I have no opinion on DELL and don't follow the tech industry.
ReplyDeleteThanX Dom. Looks good. I think your thesis about the economy and tech being a leading winner is what Wall Street is anticipating. On a weekly chart I want to see the stock break above $16 and hold. Dell's been kind of a sleeper so I'm definitely interested.
ReplyDeleteOr, the other side of the P/E story is maybe people agree with earnings estimates, but don't consider their long-term growth prospects to be commensurate with their industry in general. Again, I have no opinion. I've just always been curious why when the math is so simple that stocks don't seem to ever really follow along so easily.
ReplyDeleteI remember Adami on Fast Money talking up IBM for two months straight saying this is a math problem, their earnings are X, give it it's long-term multiple mean of 15 and you get $120. The stock was at $100. Eventually it went to $120 and he looked good. I'm assuming that differences in prices are derived from differences in market participant's opinions.
For now I have cut this position for a small gain of $15. It is under performing my expectations. I may be a little to early for the breakout that I expect. I will look to re-establish at the lower end of the range at $14.20.
ReplyDeleteDell popped back up on my radar this p=morning as it tries to take out the $15 mark. I am in a bit of a debate with myself. I am considering options in with May expiration.
ReplyDeleteI am looking to either buy 10 $15 synthetic's for a credit of $0.15 credit
or
I am looking to buy 10 modified synthetic's where I sell the $14 put and buy the $15 call for a $0.33 debit.
Let me add that I am looking for a $16 target. If I buy the synthetic then when I reach my target I am looking at about a $1,000 gain.
But if I buy the modified synthetic I am looking at a potential of a $1600 gain as when I reach my target I would sell the calls and try to hold the puts to expiration to expire worthless. I am leaning towards this play as it leaves me a little more flexibility with the position.
Ok, so I decided to go with the modified synthetic or the official name is a risk reversal. I am going to use the 50 day MA (Currently at $14.42) as a stop on the Call side of this play. I plan to hold the short puts for now.
ReplyDelete