Hewlett-Packard (HPQ) has got to be one of the most unloved and undervalued tech stocks in the market today. I know it is much more fun and even more cool to buy the latest tech IPO even if the company has relatively scant revenues and never made a profit. When stories come out that a less than two-year-old photo sharing company was bought for about a billion dollars, it's normal to wonder why even bother investing in "old" tech?
But, I will bother investing in old tech because while it might lack the excitement, companies like Hewlett-Packard are solidly profitable and these stocks are likely to still be worth something in five years and beyond. Furthermore, buying neglected, unloved stocks like Hewlett-Packard could be far more rewarding than most investors think because expectations are so low for this company.
To show the extreme range of valuations in tech stocks, I wanted to take a closer look at Hewlett-Packard and Yelp, Inc. (YELP). I obviously did not choose to compare Yelp because it has a similar business model, but rather because it is one of the latest Internet stocks to go public and also because both stocks are trading for close to $25. When you see what 100 shares of Hewlett-Packard can provide in terms of dividends and earnings power and compare that to "new" tech companies like Yelp, it makes it an easy choice for me to buy Hewlett-Packard. Let's take a closer look below:
Hewlett-Packard is a highly diversified tech company and it designs and manufactures printers, computers, software, and also offers consulting and other business technology services. Investors have beaten this stock down to bargain basement valuations due to management missteps, which included trying to launch a tablet device to compete with the iPad, as well as heavy turnover in the CEO position.
Another issue has been that a number of divisions within Hewlett-Packard are not seeing growth, and that is what most tech stock investors want. However, the company recently added Meg Whitman as CEO and some parts of the business look poised for growth in the future. Hewlett-Packard shares look like a bargain even if the business sees no growth, with a price to earnings ratio of just about 6. How many times have we all seen stocks that the market ignores or even sells down to ridiculously low valuations, only to see them double later?
Most investors either despised Bank of America (BAC) shares when it traded at $5 just a few months ago, or were too afraid to buy. Those shares went on to double in a very short time frame, and the same could easily happen if Meg Whitman sets a clear path of growth for Hewlett-Packard. The average stock in the S&P 500 Index trades for about 12 times earnings, so if this stock was just "average" and traded at that level, the shares could double and be worth about $50. While investors wait for a higher price, the dividend offers a yield of about 2%.
Here are some key points for HPQ:
Current share price: $23.41
The 52 week range is $21.50 to $41.74
Earnings estimates for 2012: $4.04 per share
Earnings estimates for 2013: $4.42 per share
Annual dividend: 48 cents per share which yields 2.1%
Yelp, Inc. is a online site that allows consumers to review a wide variety of businesses. Even though the company has been less than stellar in turning out solid profits, investors were willing to
buy and the company recently came public. Even the underwriters of the Yelp IPO seem lukewarm to these shares and some have even set price targets that are below the current stock price. Citigroup (C) and Goldman Sachs (GS) give this stock a neutral rating. Yelp shares look overvalued and investors should consider selling the stock at these lofty levels.
Here are some key points for YELP:
Current share price: $25.48
The 52 week range is $19.36 to $31.96
Earnings estimates for 2012: no estimates provided
Earnings estimates for 2013: no estimates provided
Annual dividend: none
Data is sourced from Yahoo Finance.
Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.