This is a preview of what I will be discussing on Options Action tonight:
HPQ reports their fiscal Q4 on Monday Nov 21st after the close. The options market is implying about a 7% move following earnings vs the 4 qtr average move of about 9.75%.
Since Meg Whitman took over as CEO in Sept the stock is up about 24%. At that time when the stock was in the low 20s trading at 6 year lows I took a shot on the long side and rode it up about 15%, see below.
The stock is up today on an upgrade from Sterne Agee (whatever that is)….excerpts below:
While we are making a call in front of the print, we are also making a longer term call in which we believe there is a notable positive fundamental change in the company.
Our sense talking to investors over the last few weeks is that expectations are that new CEO Meg Whitman will lower the bar to reset expectations. This makes sense coming in as the new CEO but also as global macroeconomic conditions remain very challenging. We have heard as low as $3.00-$4.00 in EPS. While we agree that numbers need to come down, we believe they will be better than feared, likely in the $4.30-$4.40 EPS range (vs. published consensus at $4.63 in EPS that nobody really believes anyway).
Uncertainty Cloud Has Been Lifted. What has changed is that in our channel and end user checks, the uncertainty clouding the company’s PC business has been lifted. This is not only positive for its PC business (31% of revenue) but also for its other businesses including printers (20% of revenue), enterprise hardware – servers, storage, and networking (17%), and services (29%), which are intertwined with its PC business with bundling and cross-selling. The feedback we are getting is that the decision to keep its PC business has given channel partners and end users relief and giving them comfort in doing business with HPQ again.
Stock Arguably Oversold. Last but not least, we believe shares are arguably oversold trading at 5-6x CY12 EPS. We believe its multiple trading could expand to 7-8x as investors get more comfortable with HPQ’s turnaround efforts. Moreover, the feedback we are getting on new CEO Meg Whitman is positive.
While some believe that she may not be the “best” choice, many would agree that she is a welcome change.
I would also add that today’s strength could be attributed to HPQ adding activist shareholder Ralph Whitworth to its board. Bloomberg article this morning suggested, “Whitworth, whose firm oversees $6.5 billion, told management his appointment would burnish credibility and that he’d press for share buybacks, higher dividends or more investment in research and development, a person with knowledge of the talks said.”
So here’s my trade:
MY TAKE: Most of the arguments made above make a lot of sense to me and I agree from a long term perspective the stock could be a great turnaround story, but near term I think the sentiment went from overly negative in Sept to a little overly enthusiastic now. HPQ is a massive ship that needs to be turned around and it will take some time. As the analyst stated above a guide down is widely expected and in some ways the lower the guide the better it will be for the stock going forward. In some ways with Whitman only there for a couple months she has a “press pass” of sorts to lower the bar low enough so that she can start to beat wall street estimates. Also when you consider the guidance that we have see from the likes of IBM and DELL in the last few weeks, I can’t imagine that HPQ has better visibility.
Near term I want to be positioned for a short term pull back in the stock of about 10% back to support around $25.00
TRADE: HPQ ($28) Bought Nov25th weekly 27/25 Put Spread for .45
-Bought 1 Nov25th weekly 27 Put for .65
-Sold 1 Nov25th weekly 25 Put at .20
Break-Even on Nov25th weekly Expiration:
Profits btwn 26.55 and 25 make up to 1.55 with max gain 25 or lower make full 1.55
Losses btwn 26.55 and 27 lose up to .45, above 27 lose all .45 or about 1.5% of the underlying.
TRADE RATIONALE: I want to continue to short stocks that I feel have gotten ahead of themselves into events where expectations remain high relative to the recent price action. I also think that while many have discounted the guide down, when it actually comes, coupled with their poor competitive positioning that was only made worse through the last 5 months of management mess ups could keep the cloud over the shares until the company actually starts delivering on restructuring.
And here’s the video:
Previous HPQ trade below:
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
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…..