[private][private]HPQ $48.50–Report Feb 24
-options market implying about 3.5% move vs avg over the last 8 qtrs of ~3%–(NO big moves excluding the pre-announcement last AUG that corresponded to HURD’s departure, and that had a lot more to do with CEO scandal than the results)
Price Action: Stock up 15% ytd in what i can assume is largely a mild dead cat bounce after such a horrid stock performance last year and some general enthusiasm about “eternal” pc refresh cycle….my view is that the stock is ahead of itself near term and the new CEO ain’t gonna offer overreaching guidance on this call no matter how good the past qtr’s results are and set himself up for a disappointment later on this year…….One of the most important tasks the new ceo has near term will be to convince shareholders and wall street that he can be like Hurd, ex the sexual harassment scandal. This can only be done through solid execution and beating guidance that the company gives in the near-term, so to do this one would want to keep expectations at a level where you know you can achieve.
EQUATION FOR LEO: LOW EXPECTATIONS + SOLID EXECUTION = FUTURE BEATS, HIGHER STOCK AND HAPPY SHAREHOLDERS
BUT Lets not get ahead of ourselves, we still have the little matter of current qtr guidance and commentary for the balance of 2011…..in my opinion i see a lot of differing views from HPQ competitors/peers. For instance when CSCO reported and gave guidance 2 weeks ago, the tone form CEO John Chambers couldn’t have been worse for what has been a period of 3 qtrs of poor performance….CSCO sighted govt spendin as a key issue for their poor performance, which HPQ is also fairly exposed to. Last week DELL offered a very different picture citing strength in servers and services where HPQ is also very exposed.
MY VIEW: from where i sit this is kind of simple, while HPQ may have had a similar qtr and be able to offer similar guidance than their competitor DELL, the likelihood of the new CEO to offer such bullish guidance would be a big mistake and my assumption will be that you will see a more guarded tone, he will want to take credit for a turn around in the stock and in the company as his predecessor did 6 years ago. I think he stock can retrace some of this years rally, want to spend as little premium as possible to make this bet
TRADE:
BUY Mar 47 / 45 1×2 Put Spread for .05
-Buy 1 mar 47 Put for .80
-Sell 2 mar 45 Puts for ~.75
Break-evens On March Expiration:
Upside: 47 or higher lose the .05 in premium u paid
Downside:
-btw 47 and 45 can make up to 1.95
-btw 45 and 43 payoff trails off
Worst case: stock 43 or below and u are put the stock at 45, but don’t start losing money until 43 down 11%
Dan discusses HPQ in the below segment:
UPDATED: Feb 23rd 9:30am
DIRECTION RIGHT, TRADE STRUCTURE WRONG–DONT SELL NAKED PUTS IN THIS ENVIRONMENT.
I am taking this trade off for a small loss. the results and guidance were horrible and it is apparent that the new CEO doesn’t have his arms around the specific challenges the company faces in the near-term.[/private][/private]