Recent Portfolio Actions With DELL, AXP and SAN

I sold at a decent profit five deep in the money Banco Santander Jan 2014 strike 5 calls bought in April when SAN was near its lows. I did not like the fact that the calls are not adjusted when dividends are distributed. I thought they would be adjusted like it used to be in the past and that is one of the reasons I bought them in the first place. Since that did not happen I sold them, I prefer to have stocks. With regards to my Santander shares I am taking all the dividends in the form of new stocks, that has helped to reduce the average buying point substantially and has avoided dilution.

I exercised one Dell strike 7.5 Jan 2013, that I bought in August 2011 for 6.56. The call was replaced by the equivalent 100 Dell shares bought at 14.06 (7.5 strike + 6.56). I thought the company was undervalued then and I think it’s even more undervalued now so I keep adding. Dell is the only company I have been seriously focusing my energy on and buying in the last few weeks. I re-started looking at it deeply once again around the time I wrote Some Thoughts About Dell. My conclusion is that the current fear surrounding the company is overblown. I added specially today to celebrate its new multi-year low :). It’s among the few companies I have added to this year and will probably continue to do it. I bought it also for my mother in law. I did not like to have a call deep in the money soon to expire losing the newly announced dividend. Not when I am buying stocks anyways. It was not economically interesting to keep it, so I exercised its option to buy some more shares.

Most of the companies I bought or added to this year have been in the technology area. The only exception being Tesco (a UK retailer). In the following links I talk a bit about the companies I refer to: Tesco, Applied Materials, Cisco and Western Digital. Tesco and Applied Materials are the only new additions, the others were big additions to small positions that I already had. Even though they have all gone up they still seem quite cheap so I might keep on adding.

Finally I sold my five American Express stocks at a decent percent profit but very little in absolute terms due to the small position. It was a minuscule position that I bought before the 2008 crisis when I had less money and even less knowledge. After buying the stock it dropped more than 60% to the low teens and it seemed then quite undervalued so I kept it. I never added near its lows because I concentrated on several other opportunities I knew better. Anyways until recently it was not interesting to sell and I preferred to wait for its recovery while collecting the dividends. Another reason I sold is that it seems it’s near fair value and I do not like to have small positions in such conditions. I felt I did not know well enough the company and my time is dedicated to study what I consider are better opportunities. I also have my doubts about how sustainable the card business is, specially when I see what is happening with new players such as Paypal. Anyways the company seems quite good but my problem about having small positions is that they may do more harm by not focusing on them or detracting attention than the small benefit that they bring due to the added diversification.

Cheers!
jrv

PD: Interesting interview with Dell’s CEO: Michael Dell: On his company’s end-to-end solutions transition, new tech trends & post-PC era

Here is an excerpt: If you look at the IT market, there are about 10 companies with more than one per cent of this 3 trillion and one per cent would be 30 billion. So about 10 companies and we are one of the 10, though we are the only one that is focused on the 2.75 trillion who don’t have the legacy of old stuff. Even though we have 5,000 patents and strong intellectual property, we spend a billion dollars a year on research and development. We have $50 billion in cash and so we have resources, we have asset capabilities and we can really be the next generation of end-to-end solution provider.

About jrv

I was born in Spain and lived in Belgium, Chile, France, USA, Argentina among other places. Currently I am trying to settle down in a wild place. I am "retired", even though now I dedicate more hours "working" for my investments than I ever worked in the real labor market where I used to work in IT and Banking. I am a family man, I have a lovely wife, several sons and one step daughter. I have humble tastes, I like to stay home and read about companies and investments. I started investing at 25 before the internet bubble exploded. I did not know much about investing and liked technical analysis so my results were pretty bad. Fortunately I did not have much to lose. Some years later in 2006 bored of doing only real state investments and with quite a lot of money saved I opened an account in a cheap and excellent online broker and started again. This time I did not want to commit the same mistake, so I decided to follow a model. I heard that Warren Buffett was the best at making money via stocks so I started by reading a lot about him, all of his shareholders letters and several of the books that he recommended. I learned a lot, started applying his investing principles and reading a lot of 10K's. Digested news from lots of different sources. Basically I started buying very good and cheap companies and holding them for ever if possible and if nothing changed fundamentally. When the housing crisis started I was more than 75% cash. At that time I identified good companies at incredibly cheap prices so I invested most of my savings in stocks. In less than I year I doubled. By the second semester of 2009 I turned my software company into an investment vehicle and dedicated myself full time to it. My wife and I decided to change our lifestyle and moved from Belgium to the beach in a wild country. The goal was to keep fixed costs low in order to be able to live with a minimum 6-8% yearly return but specially to move away from the inhuman life of civilization and to have finally some peace and sunny weather to concentrate better on investing. Now I can think and study about companies 60 hours a week and I am doing great. I can finally do what I want full time and can proudly say that I have never been so happy, specially also with my just born 4th son, my other great kids and my sweet wife who supports me fully while I study most of the day and patiently wait for the opportunity to make a swing ! You can learn a bit more about my portfolio by viewing it at www.kuchita.com/view/sumo.php or you may learn more about me and my family by following the link "Author's site" from the menu above.
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5 Responses to Recent Portfolio Actions With DELL, AXP and SAN

  1. Georgi says:

    The only problem I have with Dell is that I don’t see their moat. They are very easy to replace. Example: At work we were all Dell, we got a better price from Lenovo and it took us one day to convert. I am talking about desktops, same is with the laptops. While in the same time try to replace an AS400 server. This is why I believe in the long term (10 years) IBM is the better company to own. They are so deeply entrenched in the enterprises, that it would be a nightmare for every IT manager to try replacing them. Also, Dell laptops are garbage. I tried twice to have a Dell laptop – four times they had to replace my mother board. The second one I had a lot of problems with the video card. From my experience they are not well organised for 5 years I had to deal with four different people. In any case, good luck with your investment.

  2. jrv says:

    Hi Gogo, thanks for your good wishes! I am sorry to hear about your bad Dell experience.

    Due to the price and my greediness I personally went for a cheap Lenovo Netbook (the S3) and I could describe it as quite a crap too, but a crap I still like in some senses. The monitor got physically disconnected from the body after less than a year. It only runs with Ubuntu because with windows its a nightmare how slow it is. I’m happy it was cheap though and I dont mind that happened because I still use it and love the keyboard (the problem is that I can not move it). Its now hanging on a single cable and if I move it one centimeter it shuts down. I only had a Dell notebook from one of my previous jobs and it was the best Notebook I had. So I guess everyone has a different experience. But single personal experiences don’t necessarily count much and can be very misleading with investments. I try not to rely much on that to invest. I was just watching Dell stockholders meeting and one of their biggest investors was complaining to Michael Dell about her terrible experience with her Dell notebook. Even though she was quite annoyed by that experience it did not scare her out from investing and she understood she simply was unlucky. There are always people with bad experiences in the best products. That’s the nature of statistics.

    As I see it DELL’s moat is their customer relations, their execution, their adaptability and their integrated solutions around security, storage, servers, networks and services. They managed to completely change their company in 5 years in a way that has deeply impressed me. I love the management, specially the CEO/founder/owner. People are so blinded by tablets and smartphones and Apple in general that Dell and Intel are getting quite cheap. But the whole world depends on Intel chips and on a smaller degree, but important part, on Dell servers.

    Dell has the majority of its income from companies. And the huge majority of them run on windows. Thats not going to disappear soon, big companies are still using Cobol programs and tapes, old technology is much more resilient than most people think. Apple programs are not compatible with enterprise software thats a huge barrier to enter the enterprise kingdom of Dell.

    Dell does not have any legacy hardware to defend, like for example Hewlett Packard. It just uses open architecture PCs and embraces new technologies (like ARM) only if its profitable. Dell has been taking quite some business away from Hewlett Packard, mainly due to their flexible and scalable solutions and the fact that they do not have any legacy hardware to defend.

    I believe most companies are shifting to use cheap scalable open hardware solutions offered by Dell around the x86 architecture. Legacy products such as the AS400 are doomed to fail in my opinion. Solutions that converge on storage, network and servers and that are none proprietary are replacing legacy hardware. Dell is the company with the most compact blade server all made with open hardware that offers security, storage, network and a server all in one, and it’s scalable. And their new software division is managed by John Swainson, an IBM ex-employee with an impressive curriculum. Services is where Dell is making most money now.

    Lenovo is just mainly competing on price and is subsidized by the Chinese government, I would not bet on them. But even then in China Dell just got a good contract with Gome beating Lenovo (China’s biggest retailer). Dell is a strong brand in China and India. And in Brazil Dell is booming.

    Take into account that consumer products is a very small part of the overall income to Dell. That was not the case 4 years ago. But common perception is that Dell just sells consumer notebooks. I am happy about that perception otherwise I would not be investing because the price would not be where it is if people understood it otherwise.

    I believe you had a bad experience with Dell as probably many others have had with any product but I hope and believe its not representative and has a minor effect on Dells future.

    I might be wrong and lose with this investment but I must be faithful to my study and act upon it. And right now I believe I know the company better than any analyst or investor that I have yet talked to. I believe that the risk reward has never been better to be invested, and fortunately it keeps getting better every day.

    I would like to write more reasons why I like it as an investment but I am too busy studying it more and buying (just added more today) .

    Even if Dell consumer sales of PCs and Notebooks are wiped out their earnings and cash flows would be very high in relation to the current price. My investing thesis does not rely on that to improve, it seems cheap even without it.

    Cheers!
    jrv

  3. Georgi says:

    What you say sounds convincing, I have to dig deeper to see about their service and server business. If what you say is true, then yes they are a good value. I have had a good dell laptop too, but lately they are bad, I have observation over a relatively large sample. You are right in one thing – Lenovo is bad too.
    I will sell one November put option contract 10 strike, just to keep myself interested :)

    Good investing, Georgi

  4. jrv says:

    This is a recent e-mail exchange with a reader:

    Hi I read your post about DELL. It is very interesting I am looking at this company as well.

    One point I want to make is that HPQ has a much robust server/blade market share, even though DELL enjoys a better growth rate in the same segment year over year.

    I am more inclined to buy HPQ on dip vs DELL, what do you think?

    Regards
    ****************
    Hi David,

    I am afraid of HPQ simply because of their story with acquisitions and corporate culture. Its cheap but also dell is cheap and I trust much more dells managament, the founder owner is a majority stock holder as bought shares at even higher prices

    Dells blade servers from what I have seen are now the best. They are the most compact and include 3 – 2 – 1 which means 3 storage units, 2 network units and une server.

    Another thing I like about dell is their amazing transformation from pure pc/notebook player to services. Now more than half of their profits are outside of the client pc segment. Thats very very different to just 4 or 5 years ago.

    I have also heard that hewlett packard has been losing business to Dell.

    So overall the reason I buy dell is that its cheap and in my opinion it is a better company and for sure better managed than hewleet packard. I do find ewlett packard cheap though but I have too many doubts about the company itself so at most I would buy it as a trade (but I do not trade) so I stick with dell as a long term investment.

    In any case please dont believe too much what I say I have been wrong several times before and you should do the research yourself so dont take me too seriously.

    Cheers !
    jrv
    *******************
    I did some checking of Dell vs HPQ with my friends.
    Surprisingly small shops prefer Dell.

    With today’s fall, both companies look more attractive to me.

    I think folks soon realize that most need a good pc or server, vs replacing expensive iPhone every 2 years.
    ****************
    Hi David,

    Roughly one third of the internet is run with a Dell server.

    Not surprised at all that small shops prefer Dell. Dell is leader in small and medium businesses. That’s the fastest growing sector in the economy. Dell grows with those companies and scales very well. It’s precisely part of their strategy. Hewlett is more into big businesses where competition from Cisco and Oracle and Ibm is stronger.

    HPQ is losing important customers, this is one of the reasons sales are falling, it was mentioned on the analyst presentation yesterday :

    HP Enterprise Services
    Mike Nefkens, acting global HP Enterprise Services leader, and JJ Charhon, senior vice president and chief operating officer, HP Enterprise Services, will give an overview of the turnaround plans for HP’s Enterprise Services group. Due to several factors, including exceptional runoff in four major accounts and selective pursuit of deals to ensure the appropriate margin structure, HP anticipates revenue declines of 11 to 13 percent in fiscal 2013 with operating margins between 0 and 3 percent.

    A runoff in four MAJOR accounts does not bode well for the future.

    That’s one of the many reasons I prefer Dell at current prices. Dell is winning customers away from HPQ. Even Michael Dell said in the last analyst meeting that they were taking away customers from a near competitors who had “one letter less” in it’s name.

    Then again HPQ does look cheap, but Dell looks also cheap and between two cheap companies I always prefer the one who has higher quality (better management, less debt etc…).

    Cheers !
    jrv

    PD: I keep adding Dell, I can get it cheaper now, specially after yesterdays help from HPQ.

  5. I had been following your blog for a while. I realize we have certain common in picking stock. I own Banco Santander share due to the following reasons.

    * It is a strong brand, and I love owning stock with strong brand.
    * It pays good dividend. Ya. 10% yield right now, and it is really good.

    Situation in Spain drags its performance right now. Ya, ~25% unemployment rate in Spain doesn’t sound good., high loan provisions, blah blah blah. But as long as it maintains its ability to issue dividend, I shouldn’t be worrying much.

    Spring always comes after winter :)

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