Is Hewlett-Packard a Solid Investment?

With shares of Hewlett-Packard (NYSE:HPQ) trading around $28, 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 has released documentation proving that the British software company Autonomy, which HP acquired for $11 billion back in 2011, committed fraud in advance of the acquisition, according to a report from the Wall Street Journal. HP has accused Autonomy of overstating its revenue and other financial information, but this documentation is the first proof HP has shown to back up its claims. According to a filing with a UK regulator seen by the Journal, an internal audit of Autonomy’s financials performed by HP found that the company’s revenue for 2010 was overstated by 54 percent. Operating profit was overstated by 81 percent. Autonomy was found to have recorded revenue for deals that were never paid for and claimed false transactions for customers that do not exist. The audit found similar overstatements in Autonomy’s financials for 2011.

T = Technicals on the Stock Chart Are Strong

Hewlett-Packard stock has performed well over the past couple of months. However, the stock is currently trading sideways and may need time to consolidate before heading higher. 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

44.04%

90%

88%

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

Put IV Skew

Call IV Skew

March Options

Flat

Average

April 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 very significant 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 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 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

-120.93%

-14.00%

-31.45%

-13.70%

Revenue Growth (Y-O-Y)

-2.77%

-8.23%

-10.14%

-5.58%

Earnings Reaction

9.04%

-12.45%

17.09%

12.28%

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

0.21%

-3.98%

-6.94%

-8.35%

-3.76%

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. The company has released documentation proving that the British software company Autonomy, committed fraud in advance of the acquisition, according to a report from the Wall Street Journal. The stock has been moving higher in recent months, but is currently trading sideways. Over the last four quarters, earnings and revenues have been declining, which has produced conflicting feelings among investors. Relative to its peers and sector, Hewlett-Packard has been a year-to-date performance leader. Look for Hewlett-Packard to continue OUTPERFORM.

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