Last week wasn’t pretty for U.S. stocks. The Dow Jones fell 1.7%. And the Nasdaq fell two and a half times more — 4.2%.
Why were tech stocks hit so hard? A big reason was the horrible first-quarter profit report from Dell Computer. Just last week, a whopping $14 billion of Dell’s market cap was wiped out!
If you’ve been reading Money and Markets, you shouldn’t be the least bit surprised. I’ve been warning you over and over to dump Dell’s shares. On March 28, in The Rise and Fall of the PC Giants, I wrote:
“Hell or high water, my Dellionaire friends [wannabe Dell millionaires] are still convinced that happy times for Dell are right around the corner.
“Hope springs eternal. That’s fine. But ignoring the dire reality can also be very dangerous.
“I don’t say that because Dell makes bad computers or is poorly managed. It’s because Dell is in a dogfight against competitors it just can’t beat …
“If you own Dell, Hewlett Packard, or Gateway … run like the dickens. Don’t look back. Don’t even think about the price you could have gotten if you had done it six years ago … or the losses you could have cut if you had sold at some subsequent peak.â€
Four weeks later, in “The Fall of Intel and Dell,†I rang the warning bells again:
“Intel’s and Dell’s days are numbered. Think I’m full of baloney? Then ask yourself why both Dell and Intel shares hit new 52-week lows last week? Yup, new 52-week lows.
“And while Dell and Intel were tanking, the Chinese market has been soaring. The Shanghai Composite Index is up by 18% so far this year and the Shenzhen Composite Index is up by almost 25%.
“As an investor, you’ll have to choose. Do you want to invest in best-known U.S. brands that are sinking … or not-so-well-known Chinese, Japanese, South Korean or other brands that are rising?â€
What really makes me happy is that you had plenty of time to act on my warnings and get out before Dell’s shares imploded. 
Here’s a copy of an e-mail I received from a Money and Markets reader last week:
“Next time you’re down this way, I owe you drinks. After reading your computer article six weeks ago (Lenova and Dell, etc.) I sold my shares of Dell that I had been holding since the last split ($80/share — $40/share post split).
“Even though I lost about $10/share after having held the stock for 5+ years, it was still good that I sold in light of recent news. I sold at $30.50 and the stock is now under $25.â€
— J.A., Austin, Texas
J.A., glad you dumped Dell before it dumped you. Unfortunately, many people didn’t.
Why Dell Has Plunged — AGAIN!
The reason for last week’s plunge was Dell’s warning that its first-quarter sales and profits would be below expectations. Dell told Wall Street to expect profits of $0.33 a share from sales of $14.2 billion.
Dell’s numbers were way below Wall Street’s forecast of $0.38 in profits from $14.5 billion in revenues. Plus, the results show that …
- Dell is going backwards! In the first quarter of 2005, it reported a profit of $0.37. As recently as last July, Dell had beaten earnings estimates for 18 straight quarters. Clearly, Wall Street isn’t used to Dell spitting up hairballs like this.
- In the old days, Dell was regularly delivering quarterly sales growth rates of more than 18%. By contrast, the current $14.2 billion projection represents a growth rate of only 6% over the year-ago level.
What’s the problem? According to Dell:
“The shortfall in earnings versus previous guidance was driven primarily by pricing decisions in the second half of the quarter that the company expects will accelerate revenue growth in the future.â€
“Pricing decisions?†In plain language, that means that prices of personal computers and laptops are falling — and fast.
Now, the only thing worse than investing in an industry suffering from falling prices is investing in an industry with both falling prices and decelerating sales.
It’s very common to see prices fall as technology moves from “gee-whiz-that’s-amazing†to an integral part of our everyday lives. That’s exactly what happened to radios, televisions, telephones, copiers, and microwave ovens.
Falling prices aren’t always bad. Businesses can actually thrive when prices start falling, provided the lower prices drive sales through the roof.
But that’s not what’s happening in the PC industry today. Today, we’re at the point where they’ve essentially sold one to everybody who needs one. The only buyers left are the stragglers that still haven’t jumped on the bandwagon and the upgrade buyers who want the newest, fastest, best version of the technology.
This Is the Stage When Profits and
Stock Prices Start to Really Fall.
And That’s Exactly Where Dell’s at Now.
Since Dell can’t sell its way out of this problem, the only option it has is cutting costs. But the cost-cutting process is the seed of both peril and opportunity for tech investors.
For example, last week, Dell announced a cost-cutting program that includes an aggressive $12.5 billion purchasing plan of lower-cost Asian computer components.
Dell’s CFO, Kevin Rollins, flew half way across the world to Taiwan to outline Dell’s new cost-cutting strategy to a small group of key suppliers expected to help Dell produce cheaper PCs and laptops. Rollins told reporters:
“Dell plans to spend $12.5 billion purchasing products in Taiwan this year to support our global business and manufacturing.
“Growing solid partnerships in Taiwan … will be key to our global expansion.â€
Aha! Taiwan! Here’s How It
Benefits from Dell’s Pain
Is Taiwan really the key?
You bet your boots! Taiwan is a pivotal player in the high-tech supply chain because it has some of the most efficient, low-cost production facilities in the world.
Here are a few facts on Dell’s presence in Taiwan:
- Dell bought $8 billion of Taiwanese components in 2004.
- It bought $10 billion in 2005.
- The company even went to the expense of establishing a Taiwan Design Center in 2002.
Now, a small handful of Taiwanese companies are about to sign billion-dollar contracts with Dell.
Who are those lucky Taiwanese customers? I’ll tell you one of them: AU Optronics, the third largest maker of liquid crystal display screens in the world.
If the name AU Optronics sounds familiar, you probably remember it from the same March 28 issue where I warned you about Dell. Here’s what I wrote:
“Dell announced that it will start selling computers with 20-inch flat screens in the second half of this year. This move is designed to justify raising its average selling price and puff up Dell’s shrinking profit margins.
“Will it work? I doubt it. In the PC olympics of years past, every race for the gold was won by the lean-and-mean companies offering the least expensive solutions.
“But I do think it will be a big boom for the big flat-panel screen makers like AU Optronics, Chunghwa Picture Tubes and Quanta Display, all of which are located in Taiwan.â€
Now, AU Optronics just reported that April sales increased to $22.4 (Taiwan) million, a 50.5% year-over-year increase.
That’s serious growth!
Shipments of large panels used in desktop monitors, notebook PCs, LCD TVs, and other products reached a new record high of 3.45 million. That represents an increase of 8.1% since March 2005. Shipments of small- and medium-sized panels rose to 6.90 million, a sequential increase of 8.5%.
Clearly, business is booming at AU Optronics. And I like the company. But please don’t miss my larger point:
Taiwan Is Chock Full of Similar Opportunities!
So are Japan, South Korea, Singapore, and China!
Dell is obviously serious about Taiwan. But it’s just one of many U.S. companies depending on Taiwan to help it hold down costs. After all …
Most of the world’s computers, both notebooks and PCs, are made in Taiwan by companies like Quanta Computer, Compal Electronics, Hon Hai Precision Industry, and Wistron Corp.
I think these companies will continue to expand their businesses over time.
According to the Taiwan Ministry of Finance, the value of Taiwan’s exports hit a record in April. We’re not talking about cheap toys and trinkets, either. The value of Taiwanese electronics surged 31.8% to $5.18 billion, accounting for 27.5% of total exports during the month.
And that adds up to wonderful investment possibilities …
Taiwan Investment Strategies
By now, it should be obvious that I’m hot on Taiwan. Here are three things to remember:
1. The best investment opportunities, and some of the most attractive valuations, are in Asia. If your portfolio doesn’t include meaningful Asian exposure, I believe you’re missing out on one of the very best opportunities you will see in your lifetime!
2. Even if your portfolio already includes a hefty dose of Asian spice, don’t make the mistake of ignoring Taiwan. Most investors I talk to are loading up on China and completely ignoring Taiwan. Yes, China should definitely be part of your portfolio. However, most of my favorites right now are in Taiwan.
3. Lastly, the biggest mistake a tech investor can make today is investing in old tech names. It is NOT too late to dump stocks like Dell, Intel, Micron Technology, Cisco, Applied Materials, and Oracle. Sure, you should have sold the first or second or third time I warned you, but all these stocks are on a very slippery slope and headed for a lot more pain.
One way to play Taiwanese stocks: Through the iShares MSCI Taiwan Index exchange-traded fund (EWT). It offers a broad stake in Taiwanese shares in one simple package.
Best wishes,
Tony
For more information and archived issues, visit http://legacy.weissinc.com.
About MONEY AND MARKETS
MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Colleen Collins, Amber Dakar, Ekaterina Evseeva, Monica Lewman-Garcia, Jennifer Moran, Red Morgan, and Julie Trudeau.
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