The Stock for September -- Hewlett Packard

Hewlett Packard (symbol HPQ) has had a truly horrible year thus far. It began the year with some upward movement, reaching $49.39 on February 10, but it has all been downhill since then. Ten days ago, the stock bottomed at 22.75. As I write this, the stock has recovered to $26.02 per share. Despite this terrible performance, I am making HPQ my stock for September. Here is why:

HPQ is enormously undervalued. It is true that the company has stumbled in a number of areas recently. It came out with its own tablet and then decided to cancel the computer after a poor reception. Now it is deciding to partially reinstate the tablet but still to cancel it soon. If this sounds confusing, it is because it is confusing. In other words, management is not handling the direction of the company well. Even so, the expectation is that the company will earn about $4.80 per share in the next twelve months. In other words, the current Price/Earnings multiple is around 5.4, a ridiculously low number.

The company has also put forth confusing signals about its PC division. It will be sold or spun off or kept with some changes. Which one? No one seems to know for sure. Indecision in public of this sort depresses the stock for sure.

Ultimately, however, one needs to remember that Hewlett Packard is a giant company which dominates the market for printers, has an enormous PC business which it may or may not keep and provides tens of billions of dollars of other computer related services and products. I storngly believe that the board will eventually (and hopefully soon) restructure the management by bringing in folks who at least somewhat know what they are doing. Once HPQ unleashes its potential, it will soar. but even if it does not soar, it should still get to a P/E of 10, still a ridiculously low number. If the earnings projections for the next year are too high by 10% and if the P/E multiple is just 10, the stock price should get to 44, an increase of just under 70% from the current market price.

For those who still are not prepared to buy, I also point out that the options for HPQ have high premiums. For example, the November 29 calls are 85 cents at the moment. By buying the stock at 26.02 and writing the November calls for 0.85, one can get a return equivalent to a dividend of 15% while capping the upside potential for the stock at a gain of 73% on an annualized basis.

Disclosure: I am long HPQ stock.