Blogvesting

The tech sector took a big tumble this past week, touched off by poor quarterly earnings from Dell. This was an irrational price movement, since Dell’s poor profits was caused by its aggressive price cutting in order to gain market share, and does not reflect on the tech sector in general. Yet, I looked on in amazement as excellent tech companies such as Intel and Nvidia, which actually stand to gain from a price war among computer retailers, also had significant stock price declines. The situation was exacerbated by short sellers trying to capitalize on the announced liquidations of several hedge funds, as well as generally dismal economic data released by the government. On Friday, when technical indicators suggested that the dive has reached its nadir, I took the plunge and increased my positions in two of my favorite tech stocks. This is based on my belief that in the near future, America’s export sector will be boosted by a weaker US dollar, and the tech sector in particular will reap disproportionate benefits because the US has a competitive edge in this sector, and because the developing economies will buy more computers as they improve their information infrastructure to western standards.

I picked up some more INTC at $20.55, which brings my average purchase price to $22.20. I have written in the past about the power of Intel’s near-monopoly position, and do not want to repeat the same argument here. Suffice to say that the price war between Intel and AMD is over, and it is abundantly clear who emerged the victor. Competition from Asian fabs is unlikely. At a minimum, I expect profit margins to begin to edge up, and there is a decent chance that revenue growth will also accelerate. This purchase is a no-brainer to me.

I also picked up a little DELL at $20.54, which brings my average purchase price to $22.00. I am slightly less confident about this position. Dell was once the lowest-cost producer of desktops, but as US demand shifted to laptops, it was caught unprepared as other retailers which outsourced their manufacturing were able to respond more nimbly, and its problems were further aggravated by deteriorating product quality and customer service as Dell tried to imitate Walmart by ruthlessly slashing costs. Since Michael Dell returned to the helm of the company, he has moved to correct all these problems, improving customer service and product design, abandoning its direct sales model and trying to sell laptops through retailers, as well as more recently trying to sell its factories and outsource more of its desktop production (Dell already partially outsources some of its laptop production). Dell has also made extraordinary efforts to return to its customer-responsive roots (this was one of the original advantages of direct sales; you hear first-hand what the customer wants), selling Linux-powered PCs and PCs stripped of bloatware in direct response of customer feedback. In the near future, profits are likely to be slim as Dell battles to regain market share lost to HP and Apple. However, I think that Dell’s low-cost culture is fundamentally correct (although Dell did overdo it in the past), and that a large segment of the computer market is likely to be commodity-like and price-sensitve. The purchasing power of the dominant retailers (i.e. Dell and HP) gives them volume discounts unavailable to smaller players. Even IBM found it difficult to eke out a profit with its Thinkpad laptops, which had to be sold to Lenovo. The major costs of a laptop is the CPU and OS, and the labor cost is minimal, which reduces the competitive adviantage of the Asian manufacturers. For the foreseeable future, the US and European markets are likely to be dominated by Dell and HP, while the Asian computer retailers may receive partial market protection in their home markets. At this price level, I think that DELL has a reasonable upside and minimal downside. I am especially impressed by Michael Dell putting his money where his mouth is, and making personal purchases of significant quantities of DELL stock.

I am also keeping a close watch on NVDA and CYMI, the last two of my technology holdings. I may readjust my holdings in this sector in the near future, and I’m aiming for a 25 to 30% portfolio exposure to the tech sector.