Dell is an integrated technology solutions company situated in Texas, United States. However, it has a worldwide presence in the technology world. It develops, designs, and sells all manner of computer hardware and software. This includes desktops, tablets, laptops, anti-virus, and workstations. It is the third best seller of computers after HP and Lenovo. Michael Dell started the company in 1984. Currently, it employs over 120, 000 people directly with other indirect affiliations. It has recently acquired a number of other smaller companies such as Perot Systems and Alienware. This has solidified its place in the market, enabling it to have a pole position in the trade and manufacture of computers. Some of the company’s strong points include a well-organized Supply Chain Management and a huge online presence. The company has customers across the globe. This is because of its pricing and product development strategy that allows users to purchase their products easily and cheaply. This is also attributable to the strong Supply Chain Management mentioned above. It has won a number of innovation awards and brags of being listed in the exclusive Fortune 500 list. The major competitors for Dell include Lenovo, Microsoft, HP, IBM, and Samsung among others (Yahoo Finance, 2013).
As part of a long-term investment, it is worth investing in this company. Although it has one of the most volatile stocks in the NASDAQ (as shown in the calculations), it presents huge growth opportunities. The volatility is attributable to the dynamic nature of the technology world (Yahoo Finance, 2013). However, it is crucial to note that less than 40% of the world population currently accesses the products and services that Dell seeks to offer in future and offers currently. This paper is an in-depth analysis of the stock of Dell with the aim of coming up with a 10 year investment plan in the company. The paper also compares the company with other possible investment areas in the technology world such as IBM, HP, and Apple Inc (Yahoo Finance, 2013).
The company profits and cash flows represent a financially healthy company. Dell has a huge asset base though it is in technology market. In the portfolio presented where ten viable stocks are analyzed, Dell’s stock is the most volatile. With a Beta value of 34.17%, the stock response to market changes and dynamics is quite high. The most stable stock is IBM at close to 6% volatility. This means that investment in Dell may present a risk in a situation where global markets go south (Yahoo Finance, 2013).
In the recent years, the global downturn has presented a situation where investing in such a stock would have been dangerous. The economic crises witnessed in United States and Europe was a pointer for any investor to be careful with long-term stocks. However, governments and world organizations are making efforts to ensure a stable global economy. Hence, a long-term investment in Dell is likely to present some good tidings. From the portfolio, the nature of business the investor should focus on is quite evident. The Beta ratios are all above one. This indicates a highly volatile market characteristic of the technology world. This is because of the ever-changing nature of the industry. Companies record high prices over a short time, which culminates in comparatively new and trendy products. However, the technology market remains quite open with massive investment opportunities.
The standard deviation of Dell’s stock from the historical analysis is significantly higher than the mean at 11.67% and 1.8% respectively. This is an indication that the stock is quite volatile. To mitigate the risk of the sensitive nature of this stock, an individual may invest in the list of portfolio provided where stocks such as Apple inc. and HP are less volatile. However, when a stock responds rapidly to market changes it shows how well management can notice opportunities. Hence, the aim of investment is to grow shareholder value. Additionally, this volatility is crucial since it helps management to identify potential pitfalls in investment decisions. Hence, management can avoid some management decisions they embark on to mitigate corporate risk (Liu & Wang, 2010).
The Capital Market Line Theorem
According to ‘Separability’ theorem, all investors, regardless of their attitude towards risk, should hold the same risk assets in their portfolios, as shown below
Capital Market Line (CML). The crucial differences in portfolios held by investors of different psychologies are in the in-between the risky stocks and the non-risk stocks. Different investors will choose different points on the capital market line. In the above figure, point M represents the market portfolio and Rf is the rate of return on the riskless asset. All investors combine Rf and M, but in different proportions. The market portfolio is the ‘same mix of risky stocks’. Investor A for example prefers to play safe with emphasis on riskless assets. Person B has most funds in the market portfolio. Person C could have had leveraged portfolios that were added to his original funds by borrowing at Rf and putting all of them into the market portfolio (Liu & Wang, 2010).
The interior decorator school of thought suggest that different portfolio of risky assets should be prepared for differing investors to suit their tastes. In other words, points other than M on the all risky portfolio should be taken. This will clearly lead to inefficiencies in the presence of riskless asset if all the assumptions of CAPM hold. If the assumptions do not hold, in particular the borrowing assumption, then the ‘Separability Theorem’ falls. ‘Separability Theorem’ therefore maintains that investors borrow money to invest (Elton, Gruber & Brown, 2006).
In the figure below person ‘A’ combines, the riskless asset with risky portfolio M. Person ‘B’ selects his own interior decorator policy, while C combines yet another risky portfolio by borrowing at Rb. According to the above, it is then possible to say that risk and return are directly proportional. Return on investment increases with risk. In this case, for the Investor to increase his expected return, he should increase his portfolio by investing in more assets, which promise a high return (e.g. Dell). If the investor is a risk taking investor who desires to make more profits or realize more returns, he needs to invest just along the capital Market line to achieve his goal of return maximization.
Security Market Line
The Capital Asset Pricing Model (CAPM) specifies the relationship between risk and the required rate of return on assets when they are held in well-diversified portfolios. It assumes that investors are rational and they choose among alternative portfolios based on each portfolio’s expected return and standard deviation. The model further assumes that investors avoid risks as much as possible and maximize the need for wealth maximization. Additionally, such investors have homogeneous expectations with regard to asset return. In this case, all assets are marketable and divisible. In other words, it is believed under this model that the capital market is efficient and perfect (Elton, Gruber & Brown, 2006).
The CAPM is given as follows:
- RI=RF + [E (RM – RF)] ß
- Ri is required return of security i
- RF is the risk free rate of return
- E (RM) is the expected market rate of return
- ß denote Beta.
If we graph ßi and E (Ri) then we can observe the following relationship:
All assets that are priced correctly will lie on the security market line. Any security off this line will either be overpriced or underpriced. The security market line therefore shows the pricing of all assets if the market is at equilibrium. It is a measure of the required rate of return if the investor were to undertake a certain amount of risk. The investor therefore has the option of reducing her risk of exposure by going for the less risky assets such as treasury bills and bonds in order to reduce this risk. The above diagram indicates that as long as you need additional returns, there is an additional risk that is associated with it. The investor can decide to take calculated risk by just investing along the security market line. Any portfolio or asset on the security market line is less risky and worthy. Treasury bills and bonds are considered less risky since they have a fixed rate of return and a fixed period of investment and every investor is assured of this return. The risk-averse investors mostly undertake this kind of investment (Elton, Gruber & Brown, 2006).
From the above analogy, I would advise prospective investors to buy the Dell stock. This is because despite its volatility and risk, it promises high returns. Additionally, the economic conditions and technology business has massive opportunities which greatly mitigate the risks involved. This is in light of the shrewd management at the company as demonstrated by the continued registration of high profits and shareholder wealth maximization. However, the investor can diversify this risk by including other stocks in the portfolio as they all have promised high returns too.
Elton, E Gruber, M & Brown, S 2006, Modern Portfolio Theory and Investment Analysis, John Wiley, New York.
Liu, Z & Wang, J 2010, Value, Growth, and Style Rotation strategies in the long- run, Journal of Financial Service Professional, Vol. 4 no. 1 pp 67-90.
Yahoo Finance, 2013, Dell Inc. Historical Prices, Web.