Benefiting from the demise of a struggling company is nothing to get excited about, but every company provides an opportunity to make money whether it is growing or receding in value. Hewlett Packard (HPQ) is one of the struggling giants trying to adjust to changing times, and it has consistently been losing value. This bearish trend provides opportunity for short income plays if we follow the trend. Looking at HPQ, I do not see a catalyst to lift it up in the short run.
On October 3rd, when HP holds its industry analyst day, it will communicate its plans for the coming year and Wall Street will be watching intently. What are some probable outcomes? If the projections disappoint, then the stock could tank farther. Then the company will have to react again as its value continue to fall. If this happens, what are some of the possibilities?
- Further layoffs
- A selloff of some of HP's larger pieces
- A split into smaller companies
Let's not sugar coat the problem. PCs, printers, and services were $23.3 billion of the company's $30.4 billion in net revenue and these fields are the ones hurting. PC growth is scheduled to be an anemic 0.9% this year; computer server markets are bad; printers continue to sell at lower volumes. We are in a changing world, and HP is one of those large technological matriarchs struggling to change with the times. The consumers of the world gravitate toward smartphones, tablets, and "the cloud." PCs, printers, and servers just don't excite consumers anymore.
Hewlett-Packard Co. expects to lay off 2,000 more employees than previously detailed, bringing its head-count reduction to about 29,000 over the next two years, as the technology giant seeks to turn itself around.
Technically Speaking
Despite the attempt to push up through resistance at 20.25 in August (and may I point out the familiar), the stock is still in a bearish pattern. That one push up in August appears to be giving false positive divergences in the RSI and the MACD. At least this is what I can see from my limited observations. Without that one attempt at a push up, it never would have recorded. One of two things is happening. Either the stock will continue down, or the positive divergences are real and the stock will make a turn soon. On the continued journey down the RSI and MACD both are following the chart and supporting a continuation of the bearish trend.
(click to enlarge)
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
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
