Tuesday, August 23, 2011

Buy Or Sell HP?

One of the stocks that is popping up on a lot of investor’s screens as a value stock is Hewlett Packard (HP). The technology stock has been one of the biggest losers in the sector over the past week. Hewlett Packard’s stock has been beaten down and is currently trading in the low 20’s. So, you should buy HP right?

Let’s take a look at the fundamentals of the stock. HP looks tremendously cheap. The stock trades at just six times the current year’s earnings. The stock is trading at just 1.2 times book value and 0.7 times sales. The stock currently has a 2% yield which is good for a tech name. At $20 a share, this stock looks tremendously cheap based on the strong HP brand name.

Once investors take a closer look however the stock is not the bargain that it appears to be. HP just had a big quarterly miss in its most recent earnings statement. The company missed its revenue and profit targets. HP also saw its margins declining and lowered it outlook for the rest of the year.

As if that was not enough HP announced that the company is completely changing its direction. The company is trying to transform into a business software company with an emphasis on cloud computing. HP is pulling back from its bread and butter business of selling computer hardware. This transition is puzzling and places the company’s stock off of buy lists and onto watch lists.

It is difficult to trust any earnings estimates from HP going forward as the company does not know what earnings will be. All of the revenue and profit expectations have to be thrown out the window as HP seeks to reinvent itself. I would not feel comfortable buying the stock until I am sure that the company can carve out a niche for itself in the software universe.

Until then HP has to be downgraded to a speculative buy.

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