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Tuesday, September 12, 2006

Round Rock Bottom

By William Trent, CFA of Stock Market Beat

Round Rock, Texas based Dell, Inc. (DELL) has had its share of well-publicized problems over the past year, and its chart shows it.

We are sorta-long DELL (we sold put options that will force us to buy shares if the share price falls below $20 by January). The basis for our position was, in part, Microsoft’s strength in early orders for the Vista operating system.

Although we have subsequently discussed a serious deterioration in DELL’s fundamentals we continue to be, if not optimistic, at least not pessimistic.

We draw our optimism from the recent trend of the tape. In late July the company pre-announced its disappointing quarter. The stock opened much lower (at about $19) but rallied from the lows to close at about $20.

Then, when the results were actually presented, they included news of a probe into DELL’s accounting practices and a massive battery recall. The shares declined again, but didn’t break $20 and rallied later in the day to close above $22.

And Monday, Dell’s stock fell as much as 5 percent in early trading and then regained some ground on news that a probe into its accounting will delay its quarterly regulatory filing. Again the $20 closing low was not breached and again the shares rallied later in the day.

Every time there is more bad news, the bears take their best shot at bringing down the shares. Our question is, if they can’t do it with the news flow DELL has been having, what will it take? Our bet is that DELL shares have hit Round Rock Bottom.

The author may hold a position in the securities discussed.

A current list of the author's holdings is available here.

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