3 Big Movers: Hewlett-Packard, Juniper Networks, and Best Buy

Hewlett-Packard and Juniper Networks run up, while Best Buy collapses.

Jan 19, 2014 at 12:00PM

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Despite hitting a record high on Wednesday (by just two one-hundredths of a point), stocks were down on the week, with the S&P 500 declining by 0.2%. The narrower Dow Jones Industrial Average (DJINDICES:^DJI), meanwhile, managed to put up a 0.1% gain. Within the S&P 500, technology large caps Hewlett-Packard (NYSE:HPQ) and Juniper Networks (NYSE:JNPR) were standout performers, while electronics retailer Best Buy (NYSE:BBY) brought up the rear.

Juniper Networks(NYSE:JNPR) was the third-best performing stock in the S&P 500 this week, with a 10.5% gain, ostensibly on news that activist hedge fund Elliot Management has taken a 6.2% stake and will press for cost cuts, share repurchases, and the payment of a dividend to boost the stock price to $35 to $40. I've followed Elliot for a very long time, and they are smart, value-focused, and very determined -- they once had an Argentine warship seized after Argentina defaulted on debt that Elliot happened to own. Juniper had better sharpen its pencils, so to speak.

Hewlett-Packard's(NYSE:HPQ) stock was the sixth best performer in the S&P 500 this week, gaining 7.6%, a rise that appears to have been driven by analyst actions. On Monday, Atlantic Securities initiated coverage of Hewlett-Packard with an "overweight" ("buy" in everyday language) rating. More meaningfully, Bank of America upgraded the stock from "neutral" to "buy," citing five factors:

(1) closing the P/E multiple gap on peers (LXK, IBM, STX, WDC, XRX, BRCD);

(2) stable-to-slightly increasing EPS revisions, as the turnaround/restructuring progresses;

(3) strong free cash flow (FCF) generation (15% yield);

(4) commitment to shareholder returns of 50% of FCF in dividend and buyback; and

(5) poor Street/investor sentiment.

... before concluding:

While we acknowledge secular growth challenges, we are impressed with the transformation progress and believe the risk/reward is favorable at 7.8x our C2014E EPS.

I've been impressed with HP's transformation, too, and I'll admit that I was wrong at the beginning of last year -- Hewlett-Pacard's stock nearly doubled in 2013. I don't disagree with any of the arguments B of A makes to support its "buy" recommendation, either -- nevertheless, I simply think there are easier ways for individual investors to make money in the stock market than by betting on turnarounds.

Best Buy(NYSE:BBY) was the worst-performing stock in the S&P 500 this week, by a wide margin, falling by more than a third (35.4%). Prompting this bloodletting was the Thursday release of the company's holiday period sales figures, which showed that Best Buy's "strategic investment" in price-competitiveness had failed: Management now estimates that the fourth-quarter operating profit margin will decline by a larger-than-expected 1.75 to 1.85 percentage points. Same-store sales during the holiday period fell 0.9%.

Like HP, Best Buy was a turnaround success story of 2013; in fact, the stock was one of the best performers in the S&P 500, rising by a stunning 237%. Both continue to face secular threats to their livelihood: For HP, it's the decline of the PC, for Best Buy, it's the ascent of e-commerce. However, HP has other businesses to fall back on, whereas for Best Buy, there is nowhere to hide. Last October, Foolish writer Adam Levine-Weinberg suggested that either Amazon.com or Best Buy will crumble. He was referring to the stocks specifically, but I think the same question may apply to the businesses -- in which case I know which company I'd favor.

If you're dead set on investing in a turnaround, I'd look at Hewlett-Packard before Best Buy.

Fool contributor Alex Dumortier, CFA, has no position in any stocks mentioned; you can follow him on Twitter: @longrunreturns. The Motley Fool recommends Amazon.com and Bank of America and owns shares of Amazon.com, Bank of America, IBM, and Western Digital. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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