Dell Moves Lower, and Analysts Aren’t Always Right

Dell Inc. (DELL) shares are in sharp decline mode, slipping more than 6.5% in the pre-market and off about 9% currently.  The Texas-based computer maker said after Thursday’s close  that third-quarter profit dropped 54%, citing light corporate spending on computers.

DELL is the world’s third-largest PC maker and these earnings are a contrast from the strong results recently previewed from its larger rival, Hewlett-Packard (HPQ).

DELL reported a net profit of $337 million, or 17 cents a share, for its fiscal third quarter ended October 30, down from $727 million, or 37 cents a share, in the year-ago period. Regardless of what the numbers were, the stock is down sharply and, at least for now, is bucking its recent trend as well as defying analysts’ expectations.

This past Tuesday, I was scanning the IGP to find something interesting to bring to all of you.  I found the Jan 14/12.50 put spread, an interesting play ahead of this earnings report. As noted in our trade idea, no analyst had DELL rated as a “sell,” not to mention the stock was up more than 14% in about a two-week period.

Sometimes you have to look at the situation at that moment in time and be careful to not just act based on what is on the surface. Analysts, do just that — they analyze data, many times using models that create projections and estimates, based on various inputs and research that they do. But just like you and me, they are forming an opinion.

Granted, it is hopefully an educated and researched one, but still an opinion nonetheless. If you have been following DELL or have a strong fundamental or technical view on DELL that contrasts what the analysts are projecting, don’t be afraid to apply your theory. Depending upon how much conviction you have in your theory, chose the appropriate options strategy that meets your risk appetite.

Remember the Hindenburg … this may be a grim reminder, but think about the countless hours it took the teams of engineers and designers to manufacture the largest flying machine ever built. All that time and effort failed to catch the flaws in the skin and coating, which were the main factors in the horrible incident, but I digress.

Just because an “analyst” says so, does not mean it will happen.  In the short-term, analyst upgrades and downgrades may have an effect on prices, but earnings and perception of a company’s business are typically the last word when it comes to a stock’s direction.

As for the spread trade we recommended on Tuesday to purchase at 23 cents, it hit a 40-cent bid this morning as the stock dropped, a 74% profit in three days. Don’t forget there is a beginning and an end as well as a winner and a loser in every trade; this one proved to be a winner.