2 Struggling Stocks to Consider Now (DELL, MRVL)

By Greg Jensen

Picking the bottom for a beaten-down, struggling stock is fun. It gives tremendous bragging rights and can be very profitable. Just ask anybody who bought BofA (BAC) below $3 or Ford (F) at around $1 in the depths of the recession. They will tell you that of course such established names were hugely undervalued; it was obvious.

It is also very risky. The same logic could have been applied to other established companies such as Lehman Brothers or General Motors (GM) where the outcome was very different. This is why, when considering this kind of trade, it is important to have an exit strategy. Buying out of the money puts or simply setting, and sticking to, a stop-loss level is essential.

If you do that it is always worth looking for stocks that may be about to turn. The broad technology sector currently contains a couple of stocks from different sides of the business that may be worth considering. Both Dell (DELL) and Marvell Technologies (MRVL) are at or near 52 week lows after a year of disappointing results.

Both 1-year charts above tell the same story, with a consistent decline and any hint at consolidation snuffed out by yet another disappointing earnings release. Both companies, however, are in the process of shifting their focus to some extent and, while there is no evidence yet of dramatic turn around, this may at least serve to stabilize the situation.

DELL has fallen along with other PC and hardware makers as the consumer market has shifted to mobile devices. Margins have been squeezed and sales have declined. Last week’s Q3 earnings release continued the pattern, with reported earnings down over 45% from last year on revenue over 10% lower.

They have begun to deploy some of their cash ($10.99 Billion, according to last week’s numbers) with acquisitions (including the recent purchase of Gale Technologies), share buy-backs and the announcement of a dividend for shareholders. The purchase of Gale, a provider of infrastructure automation software, illustrates the ongoing focus on enterprise, rather than consumer, business.

Recent acquisitions have yet to be accretive to earnings, but DELL remains a profitable company. A P/E of around 5 reflects an expectation of continued decline, but if the enterprise business grows while remaining profitable it could be that both revenues and earnings will at least stabilize.

Semiconductor manufacturer MRVL also released Q3 earnings last week that showed falling revenues and depressed margins. Like DELL, however, they remain profitable, have been buying back shares, and have begun to shift their focus. Shares have been hurt by their association with Blackberry producer Research In Motion (RIMM) but, ironically, RIM’s decision to switch to Qualcomm (QCOM) for their next generation of phones can be interpreted as a good thing. MRVL has had some success in the growing low end Chinese smart phone market, and a continued presence there can only help.

In both cases an explosion in sales or profit is unlikely. It may well be, however, that the worst is over and, given the market’s tendency to assume the worst for a falling stock, any improvement by either company will present a significant short term opportunity. DELL in particular has significant short interest, which may exaggerate any recovery in the share price.

Trying to pick the bottom for the stock of troubled companies is, as I said, risky and an exit strategy is a must, but both DELL and MRVL are still profitable and solvent, which limits the risk somewhat. In a situation like this, utilizing options in their simplest form, by buying puts that you hope will expire worthless, adds to the cost per share, but controls the downside. It may be a risk worth taking.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.