Buy HP For A Rally Into 2013: Autonomy Debacle Might Have Marked The Bottom

| About: HP Inc. (HPQ)
This article is now exclusive for PRO subscribers.

Hewlett Packard (NYSE:HPQ) shares have been one of the worst performing tech stocks in the market. However, what is interesting is that HP shares were trading at about $14 before it announced that it would be taking a $8.8 billion charge for the "Autonomy" acquisition in 2011. This software company is based in the United Kingdom and it was supposed to add growth for Hewlett Packard which is why HP was willing to pay an astounding $11.5 billion for the company. However, things don't seem to be working out as hoped and HP CEO Meg Whitman discussed why the massive charge was being taken; she stated:

"We believed there is a willful effort on the part of certain members of Autonomy management to mislead shareholders when Autonomy was a publicly traded company, and to mislead potential buyers including HP," Whitman said.

After this disclosure, HP shares dove down to new 52-week lows and hit $11.35. However, the stock is back trading to near pre-announcement (for the Autonomy charge) levels, which could be an indication that HP shares have finally put in a long-term bottom. It is still early to say this with total confidence, but it will not be surprising if one day on a timeline chart of HP shares, we can mark the lows seen in the days after the Autonomy disclosure as being a generational or long-term bottom in the stock. To be sure, HP faces challenges like slowing PC sales due to the rising popularity of tablets and smart phones.

Plus, people are just not printing as much as they used to with so much being available digitally and this impacts HP's printer business. However, the share price seems to have already more than discounted these facts. For example, analysts expect the company to earn about $3.34 per share in 2013. That puts the P/E ratio at just about 4 times earnings while the average stock in the S&P 500 Index (NYSEARCA:SPY) trades for about 14 times earnings.

Let's even say that analysts are way off and everything keeps going wrong for HP, so it only earns about $1.50 per share. Even if the company earned just $1.50 per share, HP still looks way too cheap at just $14 because that is a P/E ratio of less than 10 and the reality is that it will probably earn close to what analysts expect, well over $3 per share annually. HP shares offer a solid dividend yield of nearly 4%, which pays investors handsomely while waiting for a higher share price.

HP shares also have a fair amount of short interest, and the stock has no doubt been punished in recent weeks by investors who are selling for tax-loss reasons before the year ends. According to, about 98.5 million shares are currently short. However, with HP shares finally showing some strength and bouncing back after the Autonomy news was disclosed, it could be time to buy the stock, for at least a seasonal trade.

Investors who buy now while the shares remain under pressure from tax-loss selling and window dressing by funds, could benefit from a rally in early January as the tax-loss selling pressure is terminated. The combination of the absence of tax-loss selling and some short-covering could lead to an additional bounce in the stock in January, which makes this an ideal time to consider buying shares.

Here are some key points for HPQ:
Current share price: $13.94
The 52 week range is $11.35 to $30
Earnings estimates for 2013: $3.34 per share
Earnings estimates for 2014: $3.52 per share
Annual dividend: 53 cents per share which yields 3.8%

Data is sourced from Yahoo Finance. 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.

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.