Throw This Stock Away

The house rules are simple in this weekly column.

  • I bash a stock that I think is heading lower.
  • I offset the sting by recommending three stocks as portfolio replacements.

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

The HP weigh  
HP is no stranger to my trash heap. I suggested investors dump the stock last September, and it is trading lower today.

A lot has happened to HP along the way. It landed a new -- and surprising -- outsider CEO in Leo Apotheker. It continues to overbid on acquisitions. However, the one thing that hasn't changed is that it has yet to truly cash in on its $1 billion-plus purchase of Palm.

Well, that's about to change given Apotheker's rhetoric yesterday during All Things Digital's D9 conference. HP will begin installing Palm's webOS platform in its computers, laptops, tablets, and high-end printers.

All told, HP will be shipping 100 million devices a year with webOS.

That is a big number. Apple's (Nasdaq: AAPL  ) Steve Jobs was gushing over 100 million devices running iOS during last year's iPhone 4 introduction. We're talking about years of cumulative sales of iPhones, iPod touch devices, and the then new iPads. HP plans to hit that milestone every year.

It sounds impressive until you realize that webOS won't be the operating system of choice on most of these devices. Outside of the upcoming TouchPad tablet, webOS will be little more than pesky pre-installed software on top of Microsoft's (Nasdaq: MSFT  ) Windows. It will be just one more piece of HP's notorious bloatware that savvy buyers immediately uninstall and the not-so-savvy simply ignore.

If HP was bold enough to make webOS the default operating system, no one would buy HP machines. It's a situation that HP can't win, so it's going with a Trojan horse without an escape latch for the stealth attack. It may as well just mail webOS discs out, AOL-style. No one is going to care.

This isn't an ecosystem. It's an ego system.

It's going to fail.

Analysts aren't too excited by HP's growth prospects. They see revenue growing by a mere 2.6% this year and 3.5% in fiscal 2012. They're also scaling back their profit targets. Just last month Wall Street figured that Apotheker's company would earn $5.24 a share this year and $5.70 a share next year. Those targets have been hosed down to $5.02 and $5.37, respectively.

There is little reason to believe that this trend is about to change for the better. Buyers continue to move away from the desktops and laptops that HP sells, preferring the more portable tablet and smartphone computing options where others excel. 

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.

  • Google (Nasdaq: GOOG  ) : Big G got it right with Android. Instead of making it exclusive (iOS) or charging licensees (Microsoft), it went with a freely open platform. Handset and tablet makers flocked to the slick operating system that is now outselling the more polished Apple and Research In Motion (Nasdaq: RIMM  ) ecosystems. Monetizing open source isn't easy, but Google benefits from the gateway by securing its pole position in online advertising as "good enough" computing takes off.
  • Red Hat (NYSE: RHT  ) : You don't need to create a platform to effectively monetize it. Just ask Red Hat. The company offers Linux-based enterprise solutions on a subscription basis. This isn't as cruel as charging folks to drink from a free water fountain. Red Hat provides the support and tweaks that companies need at more attractive pricing than traditional solutions. It's clearly resonating with forward-thinking companies. Billings in its latest quarter climbed 30%, Red Hat's fastest growth there in three years. Red Hat isn't cheap, but this accelerating growth provides a welcome contrast to HP's slow fade.
  • Apple: I thought long and hard about making Dell (Nasdaq: DELL  ) my third replacement. If webOS is the bloatware straw that breaks the camel's back, Dell will be the biggest beneficiary. However, it's hard to get excited about the box makers, given the lethargic industry trends. I'll go with Apple, because it's too cheap to ignore. There's no shortage of Apple believers. Apple commands the world's highest market cap among tech stocks. However, it's only selling for 14 times this fiscal year's projected profitability and a mere 12 times next year's target. 

When it comes to HP, investors should have followed the Hurd last year.

The Motley Fool owns shares of Microsoft, Apple, and Google. Motley Fool newsletter services have recommended buying shares of Microsoft, Google, and Apple. Motley Fool newsletter services have recommended creating a diagonal call position in Microsoft. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz doesn't mind taking out the garbage every so often. He does not own any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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