Pick up some Dell while it's down

(Fortune Magazine) -- Former PC king Dell has looked like a dog for the past two years, thanks to accounting follies, management miscues, and a resurgent Hewlett-Packard. But with founder Michael Dell back as CEO, the company is showing signs of life, making it a good time to pick up the shares.

Of course, you'll have to be brave. Dell (Charts, Fortune 500) is still under investigation by the Securities and Exchange Commission for allegedly tweaking its earnings numbers to meet Wall Street targets. Analysts are not too worried about the probe, but it has meant Dell hasn't filed a complete quarterly financial report in more than a year, making it hard to get a clear read on costs, profits, and cash flow.

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In its core PC business Dell has been ceding global market share to HP (Charts, Fortune 500). And as PC buyers move from desktop computers to laptops, Dell is losing some of the advantage it reaped from its build-to-order model. (Dell relies on overseas manufacturers to help assemble its laptops.)

Now the good news: While the SEC inquiry is worrisome, Dell's internal investigation has concluded that at worst, the company overstated earnings by $150 million between 2003 and 2006 small change for a giant with profits that topped $12 billion during that time.

And though Dell is second to HP globally, the company remained the top PC maker in the U.S. this spring, with 28% of the market, according to research firm IDC. Analysts estimate that Dell's profit margins are actually higher these days because Dell and its rivals haven't started any PC discount wars.

Matthew Kather, senior research analyst at W.R. Hambrecht, has a buy rating on the stock, with a target price of $34. Kather says he expects Dell to catch up with its late regulatory filings in November, giving investors a clear look at its operations.

And he sees growth ahead: "They're on the path to regaining some market share through expanding their distribution strategy into retail." And as more businesses upgrade their systems to Windows Vista, "that will obviously drive corporate PC sales," he adds.

Most of Dell's problems seem to be reflected in the share price. Trading at about half its peak level, Dell has a P/E of 19 times estimated 2008 earnings, quite low for a tech stock. (Apple's (Charts, Fortune 500) forward P/E is 30.) From here, it shouldn't take much of a turnaround for Dell shares to recover a chunk of lost ground.