Has DELL gone the way of CSCO? Or even Worse NOK? UMMMM…..YES

by riskreversal February 15, 2011 11:00 am • Commentary

[private][private]These three once great tech companies have had very similar paths into commoditized irrelevance and innovative ignorance, in my humble opinion.  Consumers no longer identify quality, innovation or most importantly coolness with any of their products, and whats worth, the investment community has left both stocks in what appears to be the eternal penalty box.

EVENT: company reports Q4 earnings tonight after the close
-Options market implying ~6% post earnings
-Avg move over the last 8 qtrs has only been about 4%


– DELL , much like CSCO relies on public (govt) spending for a good chunk of their revenues, historically ~25%.  CSCO has blamed revenue and gross margin misses over the last 2 qtrs on shortfalls rev originally budgeted to govt entities, in that period (since Aug) stock has fallen ~24% to multi year lows)

-Gross Margins will also be a focus with the company disappointing 4 out of the last 6 qtrs on this metric.

-As always guidance or lack there of will drive stock performance in the near-term.

MY VIEW: I cant help but be bearish on names like this in a market like this where it appears a narrower and narrower group of leadership is driving the markets performance…..I think weaker business models will continue to disappoint and I want to press these shorts as I believe they will continue to make new lows.

– Interestingly (at least from this hater to anything associated with MSFT) as it relates to NOK, the company is actually going the way of DELL by agreeing last week to a broad-reaching partnership with MSFT to use their mobile OS on their smartphones….talk about the double kiss of death, not only does your hardware suck, but are teaming up with arguably the weakest mobile operating player…..stock might have actually rallied if they had uttered the name Android (which i am also not a fan of, but as long as AAPL is not going to license their mobile OS, it will have to do as a suitable second)…..

TECHNICALS: when you overlay these 3 stock (DELL-red, CSCO-blue and NOK-yellow) charts over the past 2 years you see a strikingly similar pattern which from this amateur chartists perspective doesn’t bold well for DELL when u consider the similarities in business models.

[caption id="attachment_236" align="alignleft" width="398" caption="DELL 2yr Chart vs CSCO & NOK"][/caption]


I swear this was the exact structure i was going to suggest before i saw it trade in  the market 45 minutes ago….

–A large trader just bought the DELL Mar 13/12 Put Spread for .16.

-Bought 25,000 of the Mar 13 Puts for .24 and

-Sold 25,000 of the Mar 12 Puts at .08.

Break-Evens on March Expiration:

-Downside: 12.84 (down ~7%)…btw 12.84 and 12.00 you can make up to .84, below 12.00 make .84 (5x your money)

-Upside: btw 12.84 and 13 you lose up to .16, above 13 you lose .13 premium you paid.


I want to make a bearish bet , but not want to commit a lot of premium to do so.  I also want to give myself a little time on this trade, if stock gaps lower this week due to earnings or guidance my sense would be the stock would continue to sell off over the next few weeks as large holders will exit the name once and for all…..You would only do this trade if you are predisposed to think that the stock will sell off, at least 7%.  To get a sense for what the options market thinks about the likelihood of whether or not the Mar 13 Put will be in the money at Mar exp just look at the Delta assigned to the option…….for instance the DELL Mar 13 put has a 27 delta, so options traders think there is ~27% chance that the option will be in the money on Mar exp.[/private][/private]