Is Hewlett-Packard an Attractive Investment?

With shares of Hewlett-Packard (NYSE:HPQ) trading around $34, is HPQ an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Hewlett-Packard provides products, technologies, software, solutions, and services to individual consumers, small and medium businesses, and large enterprises worldwide. The company offers commercial notebooks and desktops, consumer notebooks, desktops, software, and services for the commercial and consumer markets. The services segment provides consulting, outsourcing, and technology services to infrastructure, applications, and business process domains. The diverse technological products and services offered by Hewlett-Packard make it a leading provider that sees increased demand through global expansion.

Ralph V. Whitworth, a longtime activist investor with a large stake in Hewlett-Packard, has resigned as chairman of the computer company’s board and will take a leave of absence from his investment firm, Relational Investors, H.P. announced on Tuesday. Hewlett-Packard said Mr. Whitworth, 58, was resigning to “focus on his health,” without disclosing any details. The resignation is effective on Wednesday. H.P. said the board would discuss appointing a successor for Mr. Whitworth at its next meeting. Mr. Whitworth, who won seats on a number of corporate boards since founding Relational in 1996, was named interim chairman of H.P. in April 2013. He joined the board in 2011, not long after Meg Whitman became chief executive, and was given the task of leading an independent investigation into the company’s disastrous acquisition of the British software maker Autonomy.

“H.P. has made enormous progress reconstituting its board, implementing world-class capital allocation and corporate governance practices, and putting the company back on strong financial footing,” Mr. Whitworth said in a statement. “While I’m disappointed to step down from H.P.’s board at such an exciting time for the company, it gives me great comfort that H.P. is in such talented and steady hands.” Relational, which is based in San Diego, said that Mr. Whitworth’s responsibilities would be assumed by David H. Batchelder, who co-founded the firm, and other members of management. The firm also declined to reveal Mr. Whitworth’s condition or to say how long he was expected to be away.

T = Technicals on the Stock Chart are Strong

Hewlett-Packard stock has performed well over the past couple of months. The stock is currently trading near highs for the year and looks poised to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Hewlett-Packard is trading above its rising key averages which signal neutral to bullish price action in the near-term.

HPQ

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Hewlett-Packard options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Hewlett-Packard options

21.11%

6%

4%

What does this mean? This means that investors or traders are buying a small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Flat

Average

September Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Hewlett-Packard’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Hewlett-Packard look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

20.00%

17.46%

-120.93%

-14.00%

Revenue Growth (Y-O-Y)

-0.98%

-0.74%

-2.77%

-8.23%

Earnings Reaction

6.10%

-1.32%

9.05%

-12.45%

Hewlett-Packard has seen increasing earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have been pleased with Hewlett-Packard’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Hewlett-Packard stock done relative to its peers, Microsoft (NASDAQ:MSFT), IBM (NASDAQ:IBM), Apple (NASDAQ:AAPL), and sector?

Hewlett-Packard

Microsoft

IBM

Apple

Sector

Year-to-Date Return

22.05%

12.64%

1.21%

20.33%

15.05%

Hewlett-Packard has been a relative performance leader, year-to-date.

Conclusion

Hewlett-Packard is a software and technology bellwether that provides essential products and services to consumers and companies worldwide. Ralph V. Whitworth has resigned as chairman of the computer company’s board and will take a leave of absence from his investment firm. The stock has been moving higher in recent months and is currently trading near highs for the year. Over the last four quarters, earnings have been increasing while revenues have been decreasing, which has left investors pleased. Relative to its peers and sector, Hewlett-Packard has been a year-to-date performance leader. Look for Hewlett-Packard to continue to OUTPERFORM.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

More from Wall St. Cheat Sheet: