4 Reasons To Buy Hewlett-Packard Shares On Excessive Bearishness

| About: HP Inc. (HPQ)

Hewlett-Packard (NYSE:HPQ) shares have been in a downtrend for many months. Even though the stock is trading at extremely low valuations and near 52-week lows, investors (and shorts) found an excuse to sell the shares after the company reported earnings. It seems that the financial results and conference call confirmed what many investors have known for a very long time -- this business faces challenges.

It's not just Hewlett-Packard, as many problems are not even company-specific, but rather macro issues. For example, Dell (NASDAQ:DELL) also confirmed in a recent earnings report that PC sales are slow. Some of the macro issues include major economic weakness in Europe, a slowdown in China, and foreign currency exchange rates. Quite simply, many of the problems cannot even be blamed on Hewlett-Packard. Here are some points for contrarian investors to consider, and reasons the stock should be bought:

1. A half-empty view will not last in the long run. But in the short term, it seems that nothing can satisfy the market and shorts and shareholders are willing to sell this stock at any price. That can often be the sign of a bottom. When you see a well-known brand, and a company that still leads in a number of key markets, trading for a ridiculous price-to-earnings multiple of about 4, while the average stock in the S&P 500 trades for 13, the market just might be overreacting to the current challenges.

2. This company deserves more credit for the fact that it is able to post operating profits despite all the headwinds. Dell and other companies experiencing weakness from China and Europe show that HP is actually skillfully managing many of the severe headwinds it faces. It deserves credit for that, not a ridiculous P/E ratio of nearly 4. Just imagine what Hewlett-Packard could be earning now or will be earning in the future when, perhaps, the global economy is in better shape or when the currency exchange rates become a positive factor on results, rather than a negative.

3. Smart investors are buying Hewlett-Packard shares. It was recently reported that Seth Klarman's Baupost Group increased the stake held in Hewlett-Packard from about 17,250,000 shares to around 26,850,601 shares.

4. If the global economy is heading for a major slump due to Europe, China, and the U.S. "fiscal cliff," and if PC sales are truly in a secular decline, then Hewlett-Packard shares still might be a relatively better investment when compared to other tech giants. Shares of Intel (NASDAQ:INTC) trade for about 10 times earnings and that company could be deeply impacted by the same macro and currency issues. The same is true for Microsoft (NASDAQ:MSFT) and it trades for about 11 times earnings, which makes it look downright expensive when compared to Hewlett-Packard shares at about half that level.

Investors should be asking themselves: If you don't like HP now, when will you like it? Perhaps when PC sales are growing? When the global economy is looking much brighter? When it trades for 8 to 12 times earnings instead of 4? If you want to buy when some or most of these challenges are resolved, chances are you will be paying much more for the shares. This is one of those stocks where common sense is not currently prevailing, but one day many might be saying, "Wow, I could have bought HP shares at about 4 times earnings, below book value (which is about $20.87 per share), and with a dividend around 3%, but I didn't because it was so easy to be negative."

We know this company and the global economy face serious challenges, but investors should be asking themselves if they want to buy stocks when valuations and expectations are low, and when macro issues are challenging, or if they want to buy when the global economy is back on track and when PC sales are experiencing higher growth rates. Aren't these the types of long-term buying opportunities that many investors dream about? But when they come around, few investors act on the buying opportunity due to fear and excessive pessimism. That is one reason why more investors are interested in stocks like Apple (NASDAQ:AAPL) at over $600 per share than when things weren't going so well and Apple shares were trading for about $10, several years ago.

Here are several key data points for Hewlett-Packard (from Yahoo Finance):

  • Current Share Price: $17.92
  • 52-Week Range: $17.41 to $30
  • Dividend: 53 cents, which provides a yield of 2.7%
  • 2012 Earnings Estimate: $4.07 per share
  • 2013 Earnings Estimate: $4.32 per share
  • P/E Ratio: nearly 4 times earnings

Disclosure: I am long HPQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: No guarantees or representations are made. Please consult a financial advisor before making investments.

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