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Beware the Rally in Crap

Is there any value in tech disappointments RIMM, DELL and FB?

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You should take my “Mother Indicator” with a grain of salt, of course. But given that Facebook trades for 40 times next year’s expected earnings, my concerns about growth start looking valid. Facebook’s profits would have to grow at torrid pace in the years ahead for that valuation to be anything short of ludicrous.

Zuckerberg & Co. are anything if not creative (“ruthless” is another word that comes to mind), and I have no doubt that Facebook will find new ways to monetize its assets. But the company depends mostly on paid advertising, which is not a proven model yet in the world of social media. And rival Twitter seems to be getting more buzz these days.

Facebook is a $50 billion company with a questionable business model trading at a nosebleed valuation. If you buy it, you are betting big on Zuckerberg’s ability to innovate. I’m not willing to make that bet at current prices.


Dell is a good company in a terrible industry. It makes good computers and laptops, but both are commoditized products. There simply isn’t much premium to be charged for selling a “good” PC these days. All of the profit goes to Microsoft, the maker of the operating system, and Intel (NASDAQ:INTC), the maker of the processor.

That said, Dell is ridiculously cheap, even for a seller of a commoditized product. It sells for just 6 times expected 2013 earnings and for just 0.29 times sales, and at $9.77 per share, its price is barely above the crisis lows it hit during the 2008-09 meltdown.

Dell also has no net debt, a respectable return on equity of 27%, and a 3.4% dividend yield.

There is a lot of bearishness toward Dell for the same reason there is a lot of bearishness towards Microsoft and Intel. Computers are no longer a growth industry. While I consider them far from “dead,” tablets and smartphones are creeping deeper and deeper into territory once dominated by PCs. Investors simply have no interest in owning shares of yesterday’s tech darling.

And herein lies a potential opportunity. Dell is interesting contrarian value play. If you believe, as I do, that there is plenty of room for PCs, tablets and laptops on the desks and in the lives of most consumers, then Dell should have a viable future. And given that no one — as in not a single investor I have met in years — has any interest in owning Dell right now, your downside should be tolerably low.

If sentiment improves even modestly toward PCs, Dell could be an easy double over the next 12 to 24 months.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, Sizemore Capital is long MSFT and INTC. Sign up for a FREE copy of his new special report: “Top 3 ETFs for Dividend-Hungry Investors.”

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