MorningWord 11/20/12: Once Again, HPQ’s Board Asleep at the Wheel

by Dan November 20, 2012 9:13 am • Commentary

MorningWord 11/20/12:  This morning HPQ reported the very expected earnings and sales disappointments, and the fairly unexpected $8.8 Billion impairment charge for their 2011 acquisition of Autonomy.  To be fair, current CEO Meg Whitman has little do with this debacle, as the deal was consummated by her predecessor Leo Apotheker, who was at the helm of HP for less than 1 year, but Whitman and current board chairman were there for the closing of the deal and had the opportunity to re-evaluate the hardware behemoth’s bold, and expensive move into Software.  The deal was conceived by Apotheker soon after he started his tenure at HPQ (he was previously the CEO of German software giant SAP) to better compete with the likes of IBM and move HPQ further away from the low margin comoditized legacy hardware businesses. Meg Whitman and Ray Lane should probably be fired for not doing better due diligence on the deal when they came in to take control of HPQ, and Leo Apotheker and every board member who was involved in his hiring after the previously disgraced CEO Mark Hurd was cast out should also be fired.  The lack of sound oversight by HPQ’s board of directors over the last 10  years may go down in the record books as the worst ever.  The shareholder value that has been destroyed by empire building CEO’s has been epic, and the company continues to buyback their stock at a brisk pace, they bought back 7.6 million shares in their fiscal Q4 that just ended (fun fact: since 2003 HPQ has bought back 2x as much stock than their current market capitalization).  Well it is a dammed good thing they are buying it, cause after today I am not sure their will be any natural buyers, other than shorts possibly taking profits.

HPQ is a classic value trap, and the story just got a bit murkier. If I was a betting man I would guess that Meg Whitman will step aside at some point and the company will see its sixth CEO in 10 years. And then the story will become less about turnaround and more about breakup.

We have taken a near term bullish stance on tech, because of its oversold condition, but if yesterday’s performance by the Nasdaq is any indication of the breadth of the rally, we will be out of this long very quickly.  For instance, AAPL’s 7% surge overshadowed other large XLK components poor relative performance, MSFT, INTC & QCOM were all up less than 1%.  In the last week, the data points for the PC supply chain continue to get worse, horrible results for DELL & HPQ, INTC’s CEO being prematurely pushed out due to their inability to compete in the mobile and tablet spaces and of course the bloodletting at MSFT, their head software nerd pushed out for the obvious disappointment of Windows 8.  Avoid, Avoid, Avoid pc related stories all together, tablet cannibalization is real and their will be no PC upgrade cycle. We have been saying this all year.  If INTC and MSFT’s dividend yields are attractive, have a ball, they could be decent places to park cash considering you are spotted 3.5 – 4.5%. But buying them because you think they will return to growth is another story all together.




MorningWord 11/19/12:  Oh what a difference a weekend makes. The sentiment shift since the Nov 6th election came hard and fast, catching investors both large and small off-sides.  It is our opinion that recent losses were relatively self-inflicted wounds by most, as complacency has generally been ignored since early summer.  As Enis mentioned this morning in his MacroWrap, different markets take different sorts of investment/trading styles; whether we are in a Bull or a Bear, this new regime appears to be well suited for “Guerrilla Tactics”  

We have gotten our share of questions of why it appears that we are shortening the duration of our options trades, regardless of the expiration that they fall in.  I guess with volatility relatively subdued, expressing directional views with options seems like the way to play, and we are taking what the market is giving us.  When we lay out a trade, we usually give the “break-even” at the expiration, largely because it can make the most sense to give the max risk and the max gain, but obviously there are a whole host of potential outcomes in between.  While our goal is always to make the maximum profit in a trade, we carefully weigh the profit potential to the risk in the trade.  Oftentimes we will not enter a vertical spread that does not at least offer a 3 to 1 payout, but often times we will take it off for a double.  That may sound counter-intuitive, but this also has to do with conviction level of the trade.  The further out of the money, the wider the spread, sometimes it reflects lower conviction, we want to express the view, and as Enis said earlier, we “set it and forget it”, we are risking what we are willing to lose. I guess the opposite can be said for Enis’s AAPL trade on Friday, where he spent $7.70 on a $20 wide short dated, near the money call spread.  He had a lot of conviction and is playing for a quick move through his higher, short strike and if he gets it soon, he will be happy with a double, not a triple.

So I guess our main theme this morning has to do with moving your feet, taking what the market is giving you, and not be tied down to expiration, max profits and lofty expectations.  Book profits and cut your losses quickly, “setting and forgetting” can be a costly endeavor.  One last point for those of you who read our Trading Diary for last week – the “Expired Worthless” category was likely the fewest amount of trades in months on expiration.  This is all part of our renewed focus on a being a bit more nimble, we are taking more losses (albeit smaller ones) on positions that are not working.

In uncertain times, we will be less married to max profits and look for the best risk reward trades to express views.


MorningWord 11/16/12: Soon after the market closed I hopped on a plane to Dallas and missed all of the overnight earnings action, particularly in Tech. Funny thing is, financial reporters didn’t have to work to hard writing up their summaries this morning, here is Bloomberg’s TMT Pre-Market wrap:

U.S. TMT Pre-Market: Dell, Sina Rev. Views Miss, Aruba Beats 7:50
• Dell Reiterates FY13 EPS View, Sees 4Q Rev. Below Est.
• Applied Materials Sees 1Q Adj. EPS, Rev. Below Ests.; 4Q Beats
• Aruba Networks 1Q Adj. EPS, Rev. Beat Ests.
• Sina Sees 4Q Rev. Below Est; Shrs Fall 11% Post-Mkt
• Intuit 1Q Adj. Loss Per Shr Narrower Than Est.
• Marvell 3Q Adj. EPS In-Line; Sees 4Q EPS, Rev. Below Ests.
• Autodesk 3Q Adj. EPS Beats, Rev. Misses; Sees 4Q Missing Ests.    

OK you get my point, this has generally been a theme throughout Q3 earnings season, meet or slight beat/ miss in Q3 and guide down for Q4, while earnings growth has been scarce.  I guess there are 2 ways to look at this, first managements are being overly cautious and the lowered expectations set up for upside surprises during Q4 reporting season in Jan/Feb, or second the earnings picture is deteriorating based on a whole host of factors after a fairly long economic recovery since early 2009.  I am not an analyst and I don’t model companies, but as usual it appears that most Wall Street analysts got caught off-sides on the second half of the year’s slowdown in earnings growth, showing a marked decline year over year from last year in Q3.  Quoting Factset’s Earnings Insight report from Nov 9th:

The blended earnings growth rate for Q3 2012 is -0.1%. If -0.1% is the final growth  rate for the quarter, it will mark the end of the eleven-quarter streak of earnings growth for the  index.

I guess one reason that we have become less bearish of late is that the odds are not exactly in our favor for an all out meltdown as we  head into an increasingly short balance of 2012.  After today, we have about 25 real trading days in the year left, while many will be marked with “Holiday-like” trading, of low volume, and next week will be the start of it.   So when you consider that most major indices just lost about a half of their ytd gains in the last 6 weeks, large investors will be massively incentivized to hold things together, do their best to meet or beat their benchmarks and get PAID$$.

I would also add that this is not exactly and attractive period to be long a lot of short dated premium, as the decay will likely offset gains earned on direction. This is one large reason that we have used this past weeks weakness to close most of our Nov and Dec long premium trades.

At this point, we want to let things shake-out a bit, see if 1350 is the nice round number and support that many bulls hope it is.  I will add one more point, it seems like the whole investment world is waiting for some sign from AAPL, and frankly we are too. I don’t believe that the broad market can have a meaningful comeback without some leadership, and AAPL seems like just the stock to get back on its horse, even if just for a little while.  Readers know where we stand on this, we are making some very low risk bets that AAPL can rally in the next couple weeks, possibly back to $600, but we think the days of parabolic gains are over and that long term investors who have fabulous gains should use any near term strength into year end as an opportunity to take profits.

So we are cautiously optimistic for a near-term rally based on the technical set up of the calendar, and the possible event that the news flow and the sentiment that shifted very quickly in the last few weeks gets a bit better as investors cheer the upcoming Holiday season.