HP's Irrational Surge Fuels the Dow

Some days when the Dow Jones Industrial Average (DJINDICES: ^DJI  ) hits triple-digit gains, stocks across the board lift the index higher with a collective rise -- but not today. While many stocks are in the green, one lone, struggling tech company's explosive gains are shifting the Dow into high gear. The index has made gains of 93 points, or 0.66%, as of 2:20 p.m. EST, but make no mistake about it: Today is all about Hewlett-Packard (NYSE: HPQ  ) .

Short-term interests boost HP's run
Why HP, when the beleaguered computer-maker has wallowed in the red for so long? Shares of HP have erupted, picking up about 15% so far today. The stock was already having a good start to the year, with shares up nearly 14% in early 2013, but today's rally is something else.

It's all about the tech giant's earnings: The company pulled in $0.82 in earnings per share (with one-time items excluded) in its most recent quarter, with revenue at $28.4 billion. How does that justify the run on the stock?

HP did beat analyst projections of just $0.47 per share, and while revenue sank 6% year over year, cash flow from operations jumped 115%. A cost-cutting drive has helped the company's finances, and traders looking for a quick buck have jumped aboard HP's bandwagon, seeing the beat on analyst projections as a sign that CEO Meg Whitman's turnaround plan is working. Whitman did reiterate predictions of revenue growth in 2014 and said she feels "pretty good" about the remainder of 2013. However, a word of caution: PC sales are still slumping, and the industry doesn't look to be picking up soon. With HP's PC unit making up more than a quarter of the company's total sales, today's run -- fueled by short-term interests -- should warrant caution, not giddy optimism. This is still a company, and stock, in transition. Expect a bumpy road ahead.

Outside of HP, fellow tech stocks on the Dow are also rising. Intel (NASDAQ: INTC  ) has picked up 0.8% so far, while shares of IBM (NYSE: IBM  ) have risen 1.1%. Like HP, Intel's still struggling with a PC market in decline despite its dominant position there. While the chip maker has begun to orient itself toward other markets such as mobile, Intel still has a long way to go to catch up with more firmly entrenched competitors in those industries. IBM, on the other hand, is battling HP in the corporate IT market. While HP looks to shift resources and focus into the IT industry and away from PCs, IBM won't be supplanted easily.

Finally, United Technologies (NYSE: UTX  ) is also seeing good gains on the day, with shares of the industrial conglomerate up 0.9%. The company's stock has risen more than 6% so far in 2013 despite the looming shadow of sequestration, which could hurt UTC and its defense-oriented rivals. The company plans to cut 3,000 jobs and 1.85 million square feet of building space to save on costs, but until sequestration either passes or is avoided, the future remains murky.

The massive wave of mobile computing has done much to unseat the major players in the PC market, including venerable technology names like Hewlett-Packard. However, HP's rapidly shifting its strategy under the leadership of Whitman. But does this make HP one of the least appreciated turnaround stories on the market, or is this a minor detour on its road to irrelevance? The Motley Fool's technology analyst details exactly what investors need to know about HP in our new premium research report. Just click here now to get your copy today.

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  • Report this Comment On February 22, 2013, at 4:50 PM, Adm034 wrote:

    Poor you - you keep ignoring the obvious. Personal computers only represent 10% of hp's profit so it has no material impact on the P/E. regardless of that, the weakness in Dell and the new offerings of hp including tablets will improve the net margin and revenue of this business.

    I Gus's you have ignored the very low P/E here, the fact that hp generates free cash of 10b a year, the fact that net debit will be zero by end of this year, the huge improvement in margin specially in Printing, and the renewed focus on innovation

    People that have listened to this type of irrational advise has missed an opportunity to double their money in few months when hp was 11. My financial modeling shows that this stock will be at 35 if confidence improves about it in the street and 50 if it shows another 8% improvement in EPS which is very doable

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