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Who's Betting on Dell?

By Stansberry Research Interview Series
Monday, January 22, 2007

Dell had a rough year in 2006.
 
Increased competition came both domestically and abroad. Apple began to use Intel processors. Now capable of running Windows software, Steve Jobs' favorite fruit began to compete directly with Dell.
 
On top of this, Dell also faced increased competition in the low-end of the market from Chinese manufacturer Lenovo, which now owns IBM's ThinkPad business.
 
The company's problems extend beyond the competition.
 
In mid-August, Dell had to recall 4.1 million lithium-ion batteries when the U.S. Consumer Product Safety Commission found that these batteries occasionally overheated, increasing the risk of fire.
 
Dell began selling these batteries in its computers on April 1, 2004. Over the next two years, practically every new Dell laptop had one installed.
 
As if this weren't bad enough, both the SEC and the federal government began investigations into Dell's historic financial reports in 2006. In the latter's investigation, the U.S. Attorney for the Southern District of New York subpoenaed documents related to the company's financial reporting from 2002 to the present. The investigations meant Dell couldn't file its quarterly results on time. The Nasdaq may delist the company.
 
All in all, Dell shares plummeted almost 50% in 2006. But while the general public and Wall Street were writing off the former tech giant, insiders and investing legends were buying Dell shares hand over fist.
 
First came Dell's owner, Michael Dell, who bought 2.9 million shares of the stock, valued at $70 million, in late May 2006. Altogether, Dell's total position rose to 216 million shares, or roughly 9% of the company's shares outstanding.
 
Then there's Southeastern Asset Management, which owns nearly 5% of Dell's shares outstanding. Southeastern is run by Mason Hawkins and advises the Longleaf Partners Fund, which Hawkins manages. Hawkins is one of the truly great investors of our time. Over the last 10 years, Longleaf has shown investors average annual returns of 12%, outperforming the S&P's annual average of 8% for the same period.
 
Hawkins has bought a ton of Dell's stock. By September 30, Dell made up 10% of Longleaf's total portfolio. Currently, Dell is Hawkins' single-largest position.
 
Aside from Southeastern, Dell drew the attention of Bill Nygren from the Oakmark family of funds. Since its inception in 1996, Nygren's Oakmark Select has shown investors average annual returns of 20%. As of September 30, Nygren owned 9 million shares of Dell's stock, worth some $189 million or so. Oakmark now has 3% of its total portfolio in Dell.
 
Last, but not least, is Charles Brandes. Since its inception in 1991, Brandes' Value Equity fund has shown investors average annual gains of 13%, trouncing the market's 11% for the same period. As of September 30, Brandes owned some 49 million shares of Dell's stock. All in all, more than 2% of his fund's net assets are in Dell.
 
Dell certainly has its share of problems. But this is some very heavy buying from some very big names.
 
Good investing,
 
Graham




Market Notes
Health care leading the market… nearly every drug and medical ETF sitting at new highs.
 
REITs at new highs: Equity Office Properties, Essex Property Trust, Medical Properties Trust, Healthcare REIT.
 
Earnings today: American Express and Texas Instruments.
 
In The News: Oil demand drops for first time in 20 years... consumer confidence soars.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%

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