Beware! This Amazing Colossal Mistake Could Eat Your Portfolio

For more tales of financial frights, our Halloween special series, Avoid These 8 Investing Horror Shows, won't disappoint! 

Mark Hurd is the lucky one. If you're buying shares of Hewlett-Packard (NYSE: HPQ  ) right now, you're unlikely to escape losses owning this scream-worthy stock.

Why? HP isn't going to get anywhere near enough value for the $1.2 billion the company spent to acquire Palm, or the $2.1 billion spent to wrest 3PAR from Dell's (Nasdaq: DELL  ) hands. Combined, these businesses were accounting for just over $200 million in losses at the time they were bought.

This isn't to suggest that neither deal has value. To the contrary:

  • Storage is an imperative in data infrastructures and HP's primary competitors, IBM (NYSE: IBM  ) and Oracle (Nasdaq: ORCL  ) , both offer storage products and services to customers. 3PAR will help fill out HP's portfolio in this area.
  • Palm, meanwhile, is poised to help HP reduce its dependence on Microsoft (Nasdaq: MSFT  ) for mobile and PC operating software.

But in each case, HP badly overpaid. Just as it has with most every move it's made lately.

Consider new CEO Leo Apotheker, possibly HP's most important asset right now. He's joining the company from middling German software giant SAP, where he obtained essentially zero experience that should help him lead HP in the bare knuckles fight to come. But never mind that -- Apotheker will still get $1.2 million in annual salary anyway, the same as Hurd received when he was running the company, Computerworld reports.

HP is, in effect, a zombie, eating as many brains as it can with the hopes of getting smart enough to compete with deep-pocketed, experienced rivals.

Run Fool! Run!
Fools don't typically cite overpaying for talent or acquisitions when they talk about HP, but you'll find plenty in our Motley Fool CAPS community who are as frightened of this three-star stock as I am:

"Change [in] leadership to an unproven and little regarded leader will subdue the stock [o]ver the short-term. Investor confidence will be directed to those companies in the sector that are more stable and reliable as a value proposition," wrote Foolish investor bromere earlier this month.

Recent market moves suggests he's right. Apple (Nasdaq: AAPL  ) is up more than 16% since the Palm deal was first announced in April. HP is down close to 20% over the same period, and the S&P 500 has run about even.

Night of the living dead developers
There's a reason investors aren't buying. HP's growth prospects aren't clear. All we know is that HP wants to be a full-service technology provider, on par with IBM and Oracle. What's missing is any evidence of an obvious, defensible competitive advantage.

Unless, that is, you count market leadership in printers as a competitive edge. (I don't.)

Time is running out for HP's Palm efforts to have any impact on Apple or Research In Motion (Nasdaq: RIMM  ) or even Microsoft and its well-received Windows Phone 7. Apple sold 14 million iPhones in its most recent quarter, and Windows Phone 7 is already attracting a following among developers. Twitter has an app for the OS, and Amazon.com is planning a version of its Kindle reader for the platform. Soon, developers are going to be too busy to care what the Palm OS can offer.

But again, don't take my word for it. According to Nielsen data, iOS, BlackBerry OS, and Android are the leading smartphone systems here in the U.S. Palm, once a player, doesn't even merit a mention.

Maybe that will change when HP introduces its first line of WebOS smartphones early next year. I wouldn't bet on it; Palm's widely acclaimed Pre didn't change when it had to go up against the iPhone.

And what about tablets? Hurd sounded the tablet theme at the time of the Palm deal, but as of today, the company is selling Windows 7 tablets. If there's value being created by the team acquired from Palm, we aren't seeing it yet.

And we may never. Because here's the truth about zombies: No matter how many brains they eat, they never, ever get smarter.

Interested in more info on HP? Add it to your watchlist here by clicking here.

Looking for additional scary stories? We've got what you need in our Halloween special series, Avoid These 8 Investing Horror Shows.

Apple and Amazon.com Motley Fool Stock Advisor selections. Microsoft is a Motley Fool Inside Value pick. Motley Fool Options has recommended subscribers open a diagonal call position in Microsoft. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He had stock and options positions in Apple and stock positions in IBM and Oracle at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool owns shares of Apple, IBM, Microsoft, and Oracle and is also on Twitter as @TheMotleyFool. The Fool's disclosure policy isn't afraid of Wall Street. Boo!


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 October 29, 2010, at 11:35 AM, BertC2 wrote:

    the biggest zombie would be steve balmer, how many more brains before he gets any smarter?

  • Report this Comment On October 29, 2010, at 4:07 PM, fennecfoxen wrote:

    Has HP's purchase of 3Com (and the third? complete change of platform for their ProCurve line, is it) actually resulted in anything substantial for the company yet?

  • Report this Comment On October 30, 2010, at 2:05 AM, llucullus wrote:

    Well this company is projecting earnings next year of $5.10. This quarter estimates are for $1.25.

    Therefore the forward PE is 8.25

    Dell is trading at around 11.3

    HP has good products and has been successful. Hurd has left but the other VP's all remain and Leo could be a great success.

    This stock is down because of Hurd leaving which will not make such a hue difference in the end and bad publicity around the new appointment. However i expect this German guy will be pretty understated but also pretty smart. Just compare German economic performance against US lately.

    HP will produce huge earnings next year and when it does so the price will rise. Probably by 50% or more in the next 12 months if economy keeps on track.

    Don't let Beyers fool you

  • Report this Comment On October 30, 2010, at 2:08 AM, llucullus wrote:

    regard Palm and 3 Par Beyers is probably correct but the panel is out. However the effect on earnings if Beyers is correct will be minimal. The effect if the get it right could be large.

    So correct that they where probably bad buys wrong in that this will wreck the company which is a giant earnings and cash engine

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