Did Hewlett-Packard Punk the Market This Week?

Another record high for U.S. stocks, as the benchmark S&P 500 rose 1.2% this week, to close above 1,900 on Friday for the first time. The narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) gained 0.7%, with the technology-heavy Nasdaq Composite Index (NASDAQINDEX: ^IXIC  ) was up 2.3%.

One of the big movers this week was Hewlett-Packard (NYSE: HPQ  ) (+3.7%), which announced its fiscal second quarter results as it reaches the midway point in CEO Meg Whitman's five-year turnaround.

Mea culpa: I was wrong on Hewlett-Packard! In commenting on the Silicon Valley stalwart's fiscal second quarter results on Thursday, I wrote:

From excessive pessimism, [investors] may have swung to an excess of enthusiasm – today's drop is a correction, and today's results (and outlook) may have halted the shares' positive momentum until investors get evidence of new momentum in the business.

I had expected that the stock price action in Thursday's after-hours session, during which HP shares didn't do much of anything, would be predictive of Friday's stock market reaction, as is often the case for high-profile end-of-day earnings releases. In fact, investors had already had an early chance to react to the results during Thursday's regular trading session, when part of the release was mistakenly posted on Hewlett-Packard's website at approximately 3:28 p.m. ET on Thursday. The stock, which was in positive territory when the results leaked, closed down 2.3% on Thursday.

The market went on to prove me wrong on Friday, as the shares shot up 6.1%, recording a new 52-week high in the process. Perhaps I would have expected this, had I looked at the stock market's next-day reaction to Hewlett-Packard's prior six earnings releases since the shares bottomed in November 2012. (The next day return is the appropriate measure, as HP releases its earnings after the market's close.) As the following table illustrates, significant stock price moves appear to be the norm:

Fiscal Quarter

Earnings Release Date + 1 Day

Hewlett-Packard 1-Day Stock Price Return

Q2 2014

May 23, 2014

6.1%

Q1 2014

Feb. 21, 2013

(1.3%)

Q4 2013

Nov. 27, 2013

9%

Q3 2013

Aug. 22, 2013

(12.5%)

Q2 2013

May 23, 2013

17.1%

Q1 2013

Feb. 22, 2013

12.3%

Q4 2012

Nov. 21, 2012

2%

Source: Author's calculations based on data from Yahoo! Finance and Hewlett-Packard.

Interestingly, the shares bottomed on Nov. 20, 2012 -- immediately before the announcement of the fiscal fourth-quarter results.

The magnitude of those returns illustrates, in a somewhat fluid chronological order:

  • The depth of the pessimism that was weighing on the stock when it bottomed.
  • The uncertainty attached to the turnaround.
  • Finally, some positive surprises as the turnaround appears to gain momentum, particularly for Q4 2013.

Nevertheless, Friday's return overstates the positive reaction to HP's results: If we use as a reference price the stock price just before the leak on Thursday -- roughly $33 -- the actual stock market reaction through Friday was just +2.2% -- a positive reaction, certainly, but less than Friday's 6.1% "pop" would suggest.

Call me a cynic or call me appropriately skeptical, but I think the stock, which had bottomed under the weight of excess pessimism, may now have gotten ahead of the company's turnaround. Investors continue to expect organic revenue growth from the company, which the company (once more) failed to deliver in the last quarter. Delivering it over the next several quarters is no sure thing, either; as such, shareholders can probably look forward to more volatility in the stock.

HP rival Cisco Systems is getting ready to profit from this $14.4 trillion revolution. Are you?
Every investor wants to get in on revolutionary ideas before they hit it big -- like buying PC maker Dell in the late 1980s, before the consumer computing boom, or purchasing stock in e-commerce pioneer Amazon.com in the late 1990s, when it was nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hypergrowth markets. The real trick is to find a small-cap "pure play" and then watch as it grows in explosive fashion within its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 trillion industry. Click here to get the full story in this eye-opening report.


Read/Post Comments (0) | Recommend This Article (2)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2971262, ~/Articles/ArticleHandler.aspx, 10/26/2014 12:29:40 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement