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Dell Technologies (DELL) stock remains below analysts' price targets. This is despite the company posting lower free cash flow and FCF margins last quarter. As a result, DELL stock has been treading water, making it attractive as a short-put play.
DELL is at $117.44 in midday trading on Monday, Sept. 30. This is higher than $111.46 when I wrote my Sept. 3 article, “Dell Technologies Inc. Disappoints - But DELL Stock Could Still Be a Bargain.”
I argued that DELL was worth $143 per share, which is still 21.8% over today's price. Moreover, since then 18 sell-side analysts surveyed by AnaChart raised their average price target from $130.37 to $138.23. That is still 17.7% over today's price.
Revised Price Target
My price target is based on management's expectation of second-half growth as well as a 8.4% revenue growth rate next year to $104.5 billion. Using a 5.0% FCF margin this could result in $5.225 billion in adj. FCF (i.e., $104.5 x 0.05) for the year ending Jan. 2026.
As a result, using a 5.0% FCF yield (the same as multiplying adj. FCF by 20x), DELL stock could end up with a market cap of $104.5 billion (i.e., $5.225b x 20). This is 26.76% higher than today's market cap of $82.44 billion. This means the price target is 26.76% higher than $117.44, or $148.86 per share.
Shorting OTM Puts Works Here
In my prior article, I suggested selling short out-of-the-money (OTM) puts in DELL stock—that way the investor can make a good yield and have a potentially lower buy-in price target.
For example, I recommended the $105.00 put option set for expiration on Sept. 27, three weeks away. The premium received by investors was $2.33 for a strike price that was over 6% below the spot price ($111.46).
Since DELL closed at $120.22, so these puts expired worthless. The investor kept the income and made a good yield: 2.219% (i.e., $233 on $10,500 invested). So, now it makes sense to repeat this trade.
For example, the $110 strike price for the Oct. 25 expiry period, a little over 3 weeks from now, shows a premium of $2.24. That means that the investor, after securing $11,000 in cash with their brokerage firm, immediately receives $224 by entering an order to “Sell to Open” this strike price put option.
As a result, the short put yield is 2.04% (i.e., $224/$11,000) over the next 25 days. That is very close to the 2.219% yield made three weeks ago.
This shows that sometimes you can make money shorting OTM puts in stocks that are basically out of favor by the market. Their prices are just treading water or only moving slightly higher, leaving their put option premiums fairly high.
Downside Considerations
Also, note there are many outstanding contracts at this strike price. That means that this is a popular demarcation price for investors going forward. If DELL stock moves higher over the next week, for example, this put option premium could deflate quite a lot. That is what the short-put investor wants to see happen.
This could also provide an opportunity for investors to cover their put and capture most of the premium in a period shorter than 25 days. Moreover, even if it doesn't, DELL stock falls to $110 on or before Oct. 25, the investor's breakeven buy-in price is $107.76 (i.e., $110-$2.24), or over $10 below today's price. It provides 8.5% downside protection (i.e., $117.75/$107.76-1).
The bottom line here is that DELL stock still looks cheap based on analyst's price targets. One good way to play this is to sell short out-of-the-money (OTM) put options in nearby expiration periods.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
