My last peek at Hewlett-Packard (HPQ) was back in September when the stock continued to move down. At that time, I was bearish on the stock like the rest of the universe, but thought about taking advantage of the decline with a short-term income strategy. This is the suggestion I made:
The Option Play
The stock is presently trading at 18.21 and I am of the opinion it will continue down. For this reason, I will look at a bearish income strategy.
- Buy the November 2012 put with a strike of '19' (priced at $1.38)
- Sell the November 2012 put with a strike of '18' (priced at $0.83)
- Net Debit to Start: $0.55
- Maximum Profit: $0.45
- Maximum Risk: net debit
- Maximum Length of Play: 2 months
Reasoning behind the Play
- Playing the long-term bearish trend.
- HP already announced more layoffs.
- Still don't see much of an upside for the company.
If you have followed the company, the stock declined to a low of just over "12" and I made a 100% ROI on this play. Doesn't always happen, but I am pleased with the results. The stock turned on its heels at the start of December and has been moving up since then. In fact, before its recent top off, the stock grew over 20% in value this month already. Does this mean the stock has turned and will now move up? Or is this just a bump on a bearish screen going into 2013? Where is Hewlett-Packard going?
Topeka Capital analyst Brian White is not convinced the stock is ready to continue its move up and after the long run has placed a "buy" tag on the stock. Evidently, the run up was in anticipation of hope that a leadership shakeup was coming to the company. He called the move up an "early holiday gift." The move up is a good jumping off point for those who may have bought the stock when it was down.
What challenges does HPQ face in 2013?
Hewlett-Packard is in the IT world as a global corporation. The advances in technology, namely the cloud and data storage, have hindered the bottom line for the aged tech giant. IT competitors like EMC Corp (EMC) and Cisco (CSCO) are aggressively dreaming of claiming larger shares of the IT market while a smaller startup will always grow and take their piece of the IT world and one of them may become the next giant. This is making Hewlett-Packard less significant each month it continues to struggle. HPQ also has one of the greatest exposures in a barely treading European economy where IT spending is expected to regress further going into 2013.
HPQ may face: "Damned if we do or Damned if we don't Scenario"
As I already wrote, shares of the company expanded on the belief that a shakeup was taking place in leadership. Carl Icahn would take over and possibly encourage a breakup of the company. Deutsche Bank analyst Chris Whitmore thinks a breakup would destroy shareholder value. He does not believe it is a good strategy for the company. With a lot of inside leadership fighting, mud-slinging and finger pointing, I am not of the opinion that HPQ would be a good long-term investment at this point.
What I see in Hewlett-Packard is a sign of hope that a turnaround has taken place. Back in October, before its lowest point in November, the stock was very oversold (according to the RSI indicator) and I always look for a turnaround at its lowest point here. We did not get a turnaround yet. Even though the signals seemed to be in place for a turnaround coming, the MACD usually has its lowest point before the turnaround, but that low point did not come for 5 more weeks. The stock also remained below the middle Bollinger Band and this is important in its move up and it just broke that barrier in early December. This last move up looks strong. The whole month of December it moved up. But it just backed off a resistance point and faces a strong one at 16.5. Options: It could use the 50-day MA as support; or it could bounce off the middle band. It could be at the beginning of a turnaround.
Unfortunately, this "hope" may be short-lived when reality sets back in after holidays.