This Just In: More Upgrades and Downgrades

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At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

And speaking of the best...
What do you do when one of the best stock pickers in the business recommends buying a company that most investors have given up for dead? Personally, I listen up. And from what I hear, while everyone else in the world seems obsessed with Apple and its iPad, the folks at Standpoint Research have found an even better bargain in a bin where even value seekers fear to rummage: Dell (NAS: DELL) .

Dell may not be as popular as a new iPad. Indeed, as Standpoint itself points out, the shares have underperformed the S&P 500 by a good 10 percentage points since the company reported earnings last month. But in Standpoint's words: "Lost in all of the disappointing Q4 news was the fact that earnings estimates for next year have actually gone from $2.04 to $2.18 in the last month. So DELL, at $17.35, is now trading [for less than] 8X earnings estimates for next year."

With an EV/EBITDA of less than 5, priced at less than half its annual sales, and selling for just six times annual cash flow, Standpoint thinks Dell is bargain-priced and ripe for the picking today. I agree.

What could go wrong?
This is, however, not a popular opinion. In fact, just last month we were discussing another analyst who advised investors to sell the stock ahead of earnings: Sterne Agee. As Sterne described it, Dell was stuck between an Apple and a hard place. The company's computers weren't sexy enough to compete with Apple at high price points. And its more run-of-the-mill PCs weren't cheap enough to protect from market share encroachment by Lenovo and Acer at the market's low end.

Meanwhile, Hewlett-Packard (NYS: HPQ) , IBM, and Cisco were invading Dell's traditional "core market in small-medium business (SMB) and servers."

What could go right?
But that's OK. You see, Dell doesn't have to be the most popular computer maker in the world to make it a good investment. It doesn't have to sell the fanciest PCs, or even earn the highest profit margins on 'em. All Dell really has to do to reward the investing faithful is... sell for a reasonable price, and perform well enough to justify that price.

I think Dell fits that bill.

Consider: At $30.5 billion in market cap ($5.5 billion of which is backed up by net cash), Dell only costs about 9.2 times trailing earnings, or 6.4 times free cash flow. Net out the company's cash stash, and the price of Dell's business itself (the enterprise value) drops as low as 5.3 times free cash flow. Even if all Dell can manage to do is grow at the 5.8% annual pace analysts project for it (a faster pace than archrival HP is expected to achieve, I might add), 5.3 times FCF looks like a fair price to pay for the stock.

Now, can a stodgy old brand manage even the 5.8% growth rate needed to justify its stock price? Call me an optimist, but I think it can. The company has already taken Intel (NAS: INTC) up on its offer to develop an "ultrabook" aimed at stealing share from Apple's MacBook Air line. It's teaming up with Microsoft (NAS: MSFT) to develop a business-oriented tablet based on the Redmond giant's Windows 8 operating system -- the system that Nokia's (NYS: NOK) using to such good effect in its new line of Lumia smartphones. Modest success in either (or both?) of these ventures could give Dell the growth it needs to meet or beat consensus targets.

Foolish final thought
In fact, Dell has managed to grow faster than what Wall Street expected in three of the past four quarters, exceeding analyst estimates by double-digit percentages each time. The one time it missed -- last quarter -- Dell fell all of 2% below estimated earnings. It "missed earnings" by a penny.

When you consider that analysts are forecasting earnings declines for Dell in each of the next couple of quarters, it shouldn't be too hard for Dell to earn back that missing penny in a hurry, and prove the skeptics wrong again.

I like its chances. That's why today, I'm following Standpoint's lead and making the following CAPScall on Dell: I think it will outperform the market, and I'm willing to stake my reputation on it. (Think I'm wrong? Follow along -- and if you're sure I'm wrong, feel free to bet against me on CAPS, too.)

Looking for other likely winners from the smartphone wars? Read the Fool's new -- and free! -- report: "3 Hidden Winners of the iPhone, iPad, and Android Revolution."

At the time this article was published Fool contributor Rich Smith owns shares of Nokia. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 387 out of more than 180,000 members. The Motley Fool has a disclosure policy.The Motley Fool owns shares of Cisco Systems, Intel, Microsoft, and Apple. Motley Fool newsletter services have recommended buying shares of Microsoft, Apple, Nokia, and Intel, as well as creating bull call spread positions in Apple and Microsoft and writing covered calls on Dell. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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