Is HP Oversold After Earnings?

With shares of Hewlett-Packard (NYSE:HPQ) trading around $22, 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.

Hewlett-Packard reported earnings Wednesday morning. The company beat analyst expectations, bringing in a profit of $1.39 billion versus a loss of $8.9 billion last year, but shares still sank during pre-market trading as the company said it does not expect to see growth in the next fiscal year. The company is also planning to cut 29,000 jobs as it struggles to cope with the slumping PC market.

T = Technicals on the Stock Chart Are Mixed

Hewlett-Packard stock has been rising higher in the last few months, but the stock is now trading lower after a negative earnings report. 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 between its key averages, which signals neutral price action in the near term.

HPQ

Source: Thinkorswim

Taking a look at the implied volatility 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

37.23%

93%

90%

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

Put IV Skew

Call IV Skew

September Options

Flat

Average

October Options

Flat

Average

As of Thursday, there is 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 significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

E = Earnings Are Decreasing 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?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

-14.00%

-31.25%

-13.70%

-3060.00%

Revenue Growth (Y-O-Y)

-8.23%

-10.14%

-5.58%

-6.73%

Earnings Reaction

-12.29%*

17.09%

12.28%

-11.95%

Hewlett-Packard has seen decreasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about Hewlett-Packard’s recent earnings announcements.

*As of this writing.

P = Excellent Relative Performance Versus Peers and Sector

How has Hewlett-Packard stock done relative to its peers – Dell (NASDAQ:DELL), IBM (NYSE:IBM), and Apple (NASDAQ:AAPL) — and sector?

Hewlett-Packard

Dell

IBM

Apple

Sector

Year-to-Date Return

56.14%

36.00%

-3.48%

-6.14%

24.47%

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

Conclusion

Hewlett-Packard is a software an technology bellwether that provides essential products and services to consumers and companies worldwide. The company recently released an earnings report that has not made investors happy. The stock has been rising this year but has gapped down significantly after a negative earnings release. Over the last four quarters, earnings and revenues have been decreasing, which has produced mixed feelings among investors in the company. Relative to its peers and sector, Hewlett-Packard has been a year-to-date performance leader. WAIT AND SEE what Hewlett-Packard does this coming quarter.

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