Hewlett Packard: Investing When The Risk To Return Odds Are In Your Favor

Feb.27.12 | About: HP Inc. (HPQ)

The stock market has for some time become a big casino with the house beating the small investor. This does not mean that the little guy cannot make money, however, it does mean s/he needs to pick the time when the value opportunities occur. Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT) and Cisco (NASDAQ:CSCO) were my value picks last year and all have returned 40% plus by investing when they were out of favor and selling when they went up.

This week, Hewlett Packard (NYSE:HPQ) reported earnings of 92 cents for the quarter, which beat the street by 5 cents. The revenue was 6% light, so the stock has tumbled from $29.96 before earnings report, to recent price of $26.72. This represents a good entry point for value investors that want to reduce their risk in favor of a better reward. The stock a meager 6 PE multiple, which probably is the lowest PE of all the large cap tech stocks. The company has a new CEO who understands the dynamics of turning the weaker segments around, while allowing the better performing segments to grow more. The downside may be another 15% drop and the upside could be a 40% plus gain in the next few years. This is sound risk/reward investing for folks with a longer horizon then a few days.

Of course, there are no guarantees and the stock market is due for a large correction soon. Perhaps if an investor wanted to buy 1000 shares in HPQ, then it may be a good idea to buy 200 shares at today’s price and buy 200 more shares at every 60 cent decline. If the stock continues to go down, then the last price to pay will be around $24.50.

On another note, anyone who thinks there may be volatility ahead in stock market movements could consider a good hedge to protect a portfolio to be the ETF; (NASDAQ:TVIX) which is trading around $17.00 from a high of $109.00 and measures 2X the volatility of the market. If the stock goes to zero then the most to be lost is $17.00 a share, however, if there is a big drop in the markets because of a world event like an attack on Iran, then this could well triple in value in just a few days. This type of trading is not for widows and orphans, but anyone who understands the energetic forces of risk/reward management of investing in the stock market, may beat the house and fly the flag for the small guy.

Disclosure: I am long TVIX, HPQ, INTC, CSCO