Update: Hewlett Packard (HPQ): Down But Maybe Not Out, Let’s Give Meg a Few Months, Maybe Even a Whole Year

by Dan October 13, 2011 2:04 pm • Commentary

Update Oct 13th 2011: Since putting this trade on 3 weeks ago the stock has rallied a little more than 15%…..the rally obviously had a lot to do with the market but also to do with what got to be amazingly horrible sentiment in the name…..I am Selling this position at 2.10 for a .90 gain with the stock at 25.51....I want to look to reinstate this on a pullback which I think will come in the near future…..I will also likely make a shorter dated play in front of Meg’s first quarterly conf call in Nov.


Original Post Sept 23rd 2011: Hewlett Packard (HPQ): Down But Maybe Not Out, Let’s Give Meg a Few Months, Maybe Even a Whole Year

HPQ $21.70

Yesterday the company named board member and former CEO of EBAY to be their third CEO in less than a year and a half.  Investors and the Wall Street analyst community have met this change with skepticism….. after the stock initial 10% rally earlier in the week on the notion that now former (and short lived) CEO Leo Apotheker would be replaced, the stock has come all the way back on the official announcement of Whitman to the post and now making new 5 year lows.

The stock is down 48% ytd, and it appears that there may be no end in site to the selling as the Street just doesn’t get their recent announcements to spin out their PC division and pay $10billion to acquire UK enterprise software vendor Autonomy.  Street is neutral to negative to say the least with only 8 Buys, 20 Holds and 5 Sells.

MY VIEW: while I am not a fan of the company’s products, management or current strategy, I am willing to make a defined bet that Meg Whitman will be able to tell a decent enough story in the coming months to get value investors involved in name that trades at 5x earnings…..Whitman may not have the exact credentials to run such a complicated hardware company, but she certainly has the ability to cut the fat (company has ~320k employees) and articulate her vision to the Street.

I want to make a contrarian play that the news flow will get better in the coming months, let’s be honest it can’t get much worse and I view the biggest risk to the story being the market at this point.

TRADE: HPQ ($21.70) BUY Jan12 24/29 Call Spread for 1.20

-Buy Jan12 24 call for 1.75

-Sell Jan12 29 Call at .55

Break-Even on Jan12 Expiration:

Profits: btwn 25.20 and 29 make up to 3.80, above 29 make full 3.80

Loses: btwn 25.20 and 24 lose up to 1.20 and below 24 lose full 1.20.

TRADE RATIONALE:  Stock is severely oversold and the least bit of good news should send the stock back to the level in which it broke down from last month….Chart below shows the 50 day moving average at ~$29.00, equal to the breakdown level….Once the new management and the Board can quell the investor revolt they will aggressively look to “win the hearts and minds” as Whitman said on CNBC this morning….this should be positive for the stock.  The stock is also one of the worst performing names in the Dow Jones and I chose Jan expiration for 2 reasons, first, this sentiment shift will take some time, all eyes will be on Whitman’s first earnings call in Nov and Second, the stock could benefit in early Jan from the “dogs of the Dow” effect…..

1 Yr HPQ chart from Bloomberg