Name That Trade $HPQ – A $20 Billion Market Cap Gain

by Enis April 2, 2013 2:14 pm • Commentary

HPQ is another of the many left-for-dead stocks (NFLX and BBY among those that we’ve most discussed) that has quickly doubled over the past 6 months.  But HPQ stands out because it is by far the largest company by market to make such a move.  Hewlett is now around a $45 billion market cap, still quite a large company despite the stock’s dismal performance over the past 3 years.  But just this November, it was around a $25 billion market cap.

Dan had some intriguing thoughts on HPQ, both fundamentally and technically, in today’s Morning Word:  

HPQ has either been too big, too lazy or outclassed on the management front to achieve anywhere near industry averages (days sales outstanding for HPQ were at 48 days last qtr vs AAPL, DELL, & Lenovo at 33 days for PCs and Cash Conversion cycle at neg 35 days vs HPQ at plus 14—per MS).   What I found most interesting about MS’s take (after recently upgrading the stock to a BUY with a $27 price target) is that “HP’s revised FY13 executive compensation structure includes incentives based on ROIC and FCF metrics. Prior plans only rewarded executives based on revenue and earnings as well as individual goals. Under the new structure, HP’s compensation committee specifically highlights a focus on “cash management practices, including working capital and capital expenditures”

While these sort of compensation incentives may be common for turnaround situations, it smacks of some of the incentives that Wall Street bankers had in the middle part of last decade, and we all know how that ended.

HPQ is a bit of an enigma of a stock here after being the worst performer in the Dow last year, is the best in 2013, can u scream DOG OF THE DOW!  The stock’s 105% rally off of the 1o year lows makes for an interesting technical set up.  On a near term basis the stock is quickly approaching massive resistance at the $25 level and appears to be fairly overbought.

HPQ 2 yr chart from Bloomberg

HPQ 2 yr chart from Bloomberg

On a long term basis, November’s low should serve as the mother of all double bottoms!

HPQ 30 yr chart from Bloomberg

HPQ 30 yr chart from Bloomberg

The stock’s 64% gains year to date and only 3% short interest demonstrates a fairly large divergence btwn investor sentiment and that of Wall Street analysts who have 6 Buys, 21 Holds and 10 Sells on the stock with an avg 12 month price target of ~$18.50.  Analysts do expect 2013 to be the trough for earnings, and returning to low single digit growth in 2014.  I guess the obvious question is what sort of recovery and turnaround is already priced into the shares at current levels??  We are keeping a close eye on this one, particularly from a vol perspective as IV nears 52 week lows.

Following up on Dan’s thoughts, here’s the chart of 30 day IV (red) vs. 30 day RV (blue) over the last 2 years in HPQ, Courtesy of LiveVolPro:

Screen Shot 2013-04-02 at 1.40.57 PM


The current spread of RV over IV is one of the largest in the stock’s 2 year history.  As a result, if we do pull the trigger on an eventual HPQ trade, it would probably be through a long premium structure.  What are we looking for to enter a new trade?

On the 1 year RSI chart of HPQ, we can see that the overbought condition lasted for an extremely long time after earnings:

[caption id="attachment_24313" align="alignnone" width="632"]HPQ 1 year daily with RSI, Courtesy of Bloomberg HPQ 1 year daily with RSI, Courtesy of Bloomberg[/caption]

I’ve circled with a red oval the overbought RSI in the lower panel.  It lasted for about 6 weeks, quite a stretch for any name.  After such strong momentum, it’s rare that a stock goes straight down on the first pullback.  In most cases, there is a retest (NFLX is a good recent example).  In the case of HPQ, if the stock was able to rally back to the 23.5 – 24 area, we would likely look to initiate a short biased trade at that level.  A May put spread would likely be our trade of choice, given the low level of implied vol.  For now though, we watch and wait.