It's Not Too Late to Short Hewlett-Packard

On Friday, Aug. 6, Mark Hurd resigned from Hewlett-Packard (NYSE: HPQ  ) , the apparent fallout from charges of questionable judgment with a certain lady. HP promptly lost $10 billion in market cap. It was a bad day for Hurd, a lousy day for investors -- but a great day to be short HP.

And I believe it's only going to get better from here.

Meaning, "worse"
$10 billion in a day. You might think that was a big load for the HP shorts. But the ensuing media firestorm, with Oracle's (Nasdaq: ORCL  ) Larry Ellison stepping up to defend his friend by firing a scathing broadside at HP's board, has cost HP even more market cap in the subsequent days. Including last week's market rout (admittedly not an HP-specific event), the stock's down a total of $13 billion since Hurricane Hurd hit it. With HP shares now trading for a bare 11.6 times trailing earnings, and a single-digit multiple to next year's projections, an investor could be forgiven for thinking now's the time to step up to the plate and take a position in HP.

In fact, that's my opinion, too. I just happen to believe that the position you should take is short HP. Now here's why.

Less fun than a barrel of monkeys
Once upon a time, legendary investor Peter Lynch confided to his followers: "I like buying companies that can be run by monkeys, because one day they will be." This, in a nutshell, is the short thesis for HP haters. Simply put, HP is no longer capable of being successfully supervised by simians.

Consider: Over Hurd's tenure, HP has bought first EDS, then 3Com, then Palm in rapid succession. Some of these buys have real potential (EDS.) Others (Palm), less so. But importantly, each of HP's new subsidiaries now needs to be integrated into the mothership -- but the man with the plan for their integration, the CEO who turned the company around ... is no longer there to oversee the work.

How important was Hurd to HP? A few months back, I used Hurd's tenure at the helm of HP to illustrate just how important having a stellar CEO can be for a company's performance. Not to overstate, but it's very often the difference between success and failure. Earlier this week, my Foolish colleague Eric Bleeker painted the picture for us even brighter, with just a few quick calculator strokes. I think they're so important that I'm going to repeat them for you here:

Time 

Sales (TTM)

Profit Margin (TTM)

Return on Equity (TTM)

When Mark Hurd Took Over HP

$83.3 billion

4.3%

9.3%

Today's HP

$120.4 billion

7.1%

20.3%

Again, not meaning to overstate, it looks to me like HP-plus-Hurd was a company roughly twice as good as HP without him. And now that HP is without him, I think the company's in for an awfully rough ride.

How rough will it get? Larry Ellison doesn't mince words:

The HP Board just made the worst personnel decision since the idiots on the Apple Board fired Steve Jobs many years ago. That decision nearly destroyed Apple and would have if Steve hadn't come back and saved them. HP had a long list of failed CEOs until they hired Mark who has spent the last five years doing a brilliant job reviving HP to its former greatness.

Less fun than a barrel of monkeys
Consider the array of threats now facing Hurd's as-yet-unnamed successor. First and foremost, there's the ongoing, neverending duel to the death with archrival Dell. HP didn't fare so well in that contest prior to Hurd's arrival. I shudder to think what his departure might mean for the company.

And that's the least of HP's problems. In addition to Dell, HP now faces a whole slew of formidable opponents in the new markets that Hurd invaded. Markets which HP must now fight to win without its commander in chief. Last year's purchase of 3Com, for example, puts HP in conflict with Cisco (Nasdaq: CSCO  ) and Juniper (Nasdaq: JNPR  ) in the market for Internet and telecom communications equipment. This year's Palm push adds Apple (Nasdaq: AAPL  ) , Nokia, and Research In Motion (Nasdaq: RIMM  ) to the competitive mix. Meanwhile, as the new proprietor of EDS since 2008, you have to expect that HP is now squarely in IBM's (NYSE: IBM  ) crosshairs.

Caution: Rhetorical questions ahead
By now you have probably guessed my opinion on these questions, but I'll ask 'em anyway: Are these really the kinds of companies you think just anyone can beat? Or does HP require someone a bit more competent than the average monkey occupying the CEO's chair, if it's to have any hope of (a) integrating its new purchases successfully, and (b) managing them to competently combat all the new rivals it's taken on?

Right now, HP's board is sitting round a table, fingering a pile of darts and pondering the pincushioning of a dartboard -- but beware: Not just any executive in a monkey suit can run this company, not in its current state. And so I tell you: Unless and until they find a replacement suitable to fill Hurd's shoes, there's still time to short HP.

If you're looking for other short opportunities, my Foolish colleague John Del Vecchio, CFA, a leading forensic accountant, offers a list of warning signs to look for in this free special report -- "5 Red Flags -- How to Find the Big Short." Simply enter your email in the box below, and I'll send you the report. It's free.

Nokia is a Motley Fool Inside Value pick, Apple is a Motley Fool Stock Advisor selection, and The Fool owns shares of Oracle, but Fool contributor Rich Smith does not own shares of any company named above. Nor is he, at this time, short Hewlett-Packard. And pursuant to the terms of The Motley Fool's ironclad disclosure policy, he cannot either buy or sell short shares of HP, or of any other company mentioned above, for at least 10 days after this article posts.


Read/Post Comments (4) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 18, 2010, at 5:23 PM, Quantemonics wrote:

    I completely DISAGREE with your analysis in this story... HP has become the leading technology business on the planet because of the balls of the preceeding CEO that ran the place... Carly Fiorina!

    If you go into any store or computer center, or read online reviews or consumer reports, HP is the leading maker globally of notebook and desktop computers today, easily overtaking Dell after the 2001-2002 purchase of Compaq.

    The hard work of restructuring and integrating Compaq cost Carly her job to the good old boy -Hurd... He has reaped the rewards and taken the credit for the foundation and smarts she exhibited with real leadership.

    Buying the stock of perhaps "the" leading computer and printer maker, and service provider on the planet at less than 10x Earnings seems like a bright idea to me... Shorting it after the panic selling of CEO Hurd was discharged without honor may not work out as well as you suspect in this piece.

    Yes, I agree the PALM purchase and other decisions by Mr. Hurd were quite nonsensical. Perhaps the board correctly fired the MONKEY that has been running the show for a few years.

    JUST SAYING

  • Report this Comment On August 18, 2010, at 5:24 PM, chaz572 wrote:

    Anyone would look like a star after the incompetent, arrogant destructive force that was Hurd's predecessor. Eric's numbers don't lie, Rich, but they can't differentiate between hurd being outstanding, and Hurd being just OK next to Fiorina's God-Awful. Bottom line: I'm not sure all hope is lost in HP finding another Hurd to take the helm -- it may not be that Herculean a task. Just as long as they don't find another Fiorina.

    Oh, and BTW, for anybody who's a California resident, please bear this discussion in mind when you vote this November. Fiorina is asking for the chance to do to the entire nation what she did to HP. We're ALL shareholders of the U.S. government. Vote accordingly.

  • Report this Comment On August 18, 2010, at 8:09 PM, pstoimenov wrote:

    I disagree with the analysis in the article.

    In the public eye Hurd may be a genius CEO. But in reality has is just the successor to a really bad one (C Fiorina).

    The acquisitions he made are still about to pay off, he arguably payed too much (3com) and lost human talent to competitors (Palm).

    The morale at HP is at low point thanks to his cost cutting- great for a short term return in quarterly reports, very destructive long term. Lots of talented people are leaving the company because they can do with less stress elsewhere (I know some people who work there).

    On the positive side I would not dare to short HP stock- it is cheap and indeed a monkey should be able to run it is long as they do not screw something monumentally. The success of integrating the acquisitions would be just a bonus to the company growth. Their real strength are computers, printers and servers and the touchscreen Palms and the network gear would improve the margins but would not change the business.

  • Report this Comment On August 18, 2010, at 10:57 PM, rtichy wrote:

    1. When Hurd got put in the top spot it was mentioned in the press that he stood to benefit from all the work Fiorina did to make the merger happen and integrate. At the time, it was viewed as a somewhat natural that she should also "take the fall" for having been the one who drove the whole thing through and that another CEO would get to ride the crest of the success of that merger.

    2. The companies Hurd bought are weak in their markets.

    3. HP's dominant position in printers is formidable but their software and drivers are horrible on the Windows platform. The software is ridiculously large, hopeless at installing itself correctly and incredibly slow; I guess what I'm saying is that moat isn't as great as it might be.

    I don't know that I'd short HP, but I'd certainly watch for one of the wheels to come off!

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