Guidance Could Push This Stock Up
Companies often deliver guidance to investors, telling them what management believes the company will sell and earn in the near term.
In a recent article, Bloomberg reported,
“Dell Technologies Inc. (NYSE: DELL) raised its annual profit forecast after reporting quarterly sales and earnings that topped Wall Street estimates on strong corporate demand for computers and software. Shares gained in extended trading.
“Profit, excluding some items, will be $6.95 to $7.40 a share in the current fiscal year, executives of the company said [recently] during a conference call. In February, Dell projected $6.05 to $6.70 a share for fiscal 2020. Analysts on average estimated $6.42 a share, according to data compiled by Bloomberg.
Chief Executive Officer Michael Dell has diversified his technology empire to make it a one-stop shop for large companies upgrading their hardware and software.
That broad product lineup helped the company in the most recent period, when growth in corporate sales of desktops and laptops overcame weakness in Dell’s server and storage business.
Competitors Hewlett Packard Enterprise Co. and NetApp Inc. both reported disappointing sales because of falling demand for data-center hardware.
“While we think long technology-spending cycles hold up, what we have seen this year is a softening of demand in the server space.”
Dell reported revenue gained 2% to $23.4 billion in the fiscal second quarter. Earnings, excluding some items, were $2.15 a share in the period ended Aug. 2, the company said in a statement. Analysts, on average, projected profit of $1.50 a share on sales of $23.3 billion.”
In part, Bloomberg noted, the increased guidance is due to a broad trend,
“Companies have been upgrading their personal computers to get Microsoft Corp.’s Windows 10 software, bolstering demand for Dell’s PCs. The company’s PC division grew 5.8% in the quarter, with commercial sales rising 12%.
Revenue from Dell’s data-center hardware fell 6.6% to $8.6 billion. While sales of storage hardware were little changed from the period a year earlier, server and networking gear revenue declined 12% — a turnaround from last year, when the company saw unprecedented demand for the products.
VMware Inc., Dell’s largest software investment, helped the company with quarterly revenue growth of 12% year over year, bolstered by its partnerships with public-cloud providers, including Amazon Web Services and Microsoft Azure.
Dell executives said on the call they expected IT spending to be “soft” throughout the rest of the fiscal year, particularly in China. And the company narrowed its annual revenue projection to $92.7 billion to $94.2 billion, from the February forecast of $93 billion to $96 billion.
“There is more macro uncertainty, whether it’s the trade environment, the Brexit environment, GDP growth in Europe, yield curves inverting,” Sweet said. “As a result of that, I think you do have some customers more cautious on capital spending.”
Dell said it repaid about $2 billion of gross debt in the most recent period. The company has paid off $17 billion of debt since the 2016 close of its acquisition of EMC Corp. — the largest deal in tech industry history when it was announced at $67 billion. Dell said it expects to repay $5 billion of gross debt this fiscal year.
The quarter’s strong results “continue to support management’s ability and desire to reduce debt and improve Dell’s credit profile,” Bloomberg Intelligence analyst Robert Schiffman wrote in a note.”
Dell is now bouncing off support. The chart below shows the short trading history of the stock.
A Trade for Short Term Bulls
As with the ownership of any stock, buying DELL could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.
A Specific Trade for DELL
Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.
When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.
For DELL, the October 18 options allow a trader to gain exposure to the stock.
An October 18 $52.50 call option can be bought for about $2.50 and the October 18 $55 call could be sold for about $1.60. This trade would cost $0.90 to open, or $90 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $90.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in DELL the maximum gain is $1.60 ($55 – $52.50= $2.50; $2.50 – $0.90 = $1.60). This represents $160 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $90 to open this trade.
That is a potential gain of about 177% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.