Throw This Stock Away

Don't you wish that you could go out on top? Even when a stock is a couple of years into a masterful turnaround, your best bet may be to walk away while the going is still good.

I'm going in that direction with this week's trash toss, singling out a company that seems to be doing just fine today, but could turn potentially toxic tomorrow. Don't worry -- just as I have over the past few weeks, I'll also suggest three replacements to keep your portfolio warm.

Who to toss out this week? Come on down, Hewlett-Packard (NYSE: HPQ).

The HP weigh
HP? Really? Not Dell (Nasdaq: DELL)? Really.

I'm a huge fan of CEO Mark Hurd's work at HP. He inherited a company in disarray and turned it into a contender. Before Hurd showed up, there were quarters in which HP's printing and imaging stronghold generated more in operating profits than HP as a whole. The company's margins, relative to those of its rivals, were pathetic.  

Hurd changed that, coming over from NCR (NYSE: NCR) with the perfect blueprint to streamline operations, wash away predecessor Carly Fiorina's divisiveness, and radically enhance profit margins.

So why am I pointing the trash can, instead of applauding? Well, several signs now indicate that Hurd may have squeezed as many inefficiencies out of the old HP model as possible. Let's consider the evidence:

• HP has blown past Wall Street's estimates every single quarter since Hurd hopped on, but beating the analysts by just 2% this past quarter marks the company's narrowest win in the past year.
• Remember when printing was HP's bread and butter? This year, the division has been privy to layoffs and reorganization. Cloud computing is making everything from word processing to spreadsheets portable, and there's less of a need to fire up the printer when the documents travel with you.
• May's acquisition announcement of EDS (NYSE: EDS) is a big one. Would a company shell out nearly $14 billion in a deal if it didn't feel it was maxing out on organic growth? Consider other companies with purchases this huge before answering.
• As I pointed out in last week's heave, conventional PC systems such as HP's are losing ground to Macs and bargain-priced Linux laptops.
• Speaking of laptops, HP is growing nicely there, but Dell and Apple (Nasdaq: AAPL) are faring even better lately.

HP's prognosis may not appear to be as bleak as those of other recent installments in this column, but you're starting to see the first indications that HP's turnaround may have run its course. Hurd successfully reversed HP's waning fortunes, but I think smart competitors, smarter analysts, and a big-ticket buyout will weigh on the company's future.

Good news
Those three HP alternatives I promised? Here you go:

• Adobe (Nasdaq: ADBE): Cloud computing is the future. Publishing-software giant Adobe used to be HP's buddy, with folks printing out Photoshopped snapshots, PDF files, and Adobe-authored newsletters. Now you find most of those files simply being swapped and collaborated on virtually. Like HP, Adobe is a company with a history of blowing past Wall Street's estimates. However, it is in a better position to keep the streak going with original software and ubiquitous apps like the video-sharing standard Flash. Growth may have decelerated at Adobe in its most recent quarter, but the software developer grows more relevant with every passing period.
• Appl e: Why not? Apple is gaining market share in the PC industry with a unique product, unlike HP and Dell's attempts to turn a Windows-based commodity into a brand-building product. Apple shares aren't cheap, but Steve Jobs' leadership is worth it.
• Google (Nasdaq: GOOG): Why are open-source and Mac computers all the rage these days? Well, the Internet is the new computer. Windows may feel less relevant as a software-serving platform, which bodes poorly for HP -- but quite well for paid-search leader Google.

Other headlines from the recycle bin:

• Throw This Stock Away: Microsoft
• Throw This Stock Away: eBay
• Throw This Stock Away: Research In Motion
• Throw This Stock Away: Starbucks
• Throw This Stock Away: Yahoo!

Do you like my substitutions? Would you rather stick it out with HP? Are there other stocks I should look at in future editions of this column? Let me have it in the comment box below.