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Dow Spotlight Stock of the Week: Hewlett-Packard

By Matt Thalman - Apr 7, 2013 at 5:00PM

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An in-depth look at Hewlett-Packard, and its terrible performance this past week.

In 2013, Hewlett-Packard (HPQ -0.83%) has been the best-performing component of the Dow Jones Industrial Average (^DJI 0.15%). Shares are up more than 54%, while the Dow itself has risen by only 11.15%, and its second best-performing component, Travelers (TRV 1.05%), has climbed by just 17.53% in comparison. But this past week gave us HP's worst performance so far this year, with a 7.84% drop -- its first decline since the week of Feb. 11.

So what happened?
On Monday, one of the company's top executives, Senior Vice President Ajei Gopal, announced that he's leaving the company to join Silver Lake Partners -- the private-equity group that's attempting to take Dell (DELL.DL) private. Gopal will probably play a large role in helping Silver Lake turn Dell around, considering he's helped in the same capacity at HP. But HP's turnaround is far from complete, so this isn't a move HP shareholders wanted to see.

On Tuesday, Goldman Sachs analyst Bill Shope lowered HP stock from a "neutral" to a "sell," saying he could see shares falling 31% from Monday's closing price of $23.31. That means Shope believes that HP shares, which currently sit at $21.97, will drop to $16.09 sometime in the future.  

Wednesday brought little news, but shares fell again, probably in reaction to the downgrade. Then Thursday arrived with more drama, as the company announced that Ray Lane will step down as chairman of the board but will retain a seat. Board members John Hammergren and G. Kennedy Thompson also announced that they've chosen to resign from their positions.

Shares closed the day up 1.78%, but they resumed their tumble on Friday, falling another 1.48% during the trading session. The seesawing performance of the stock following the announcements indicates to me that shareholders have mixed feelings on the board members' moves.

During the most recent shareholder meeting, when board members were re-elected, Hammergren and Thompson received only 54% and 55% of the vote, respectively. Lane didn't do much better at 58%. Typically, board members receive more than 90% of the vote, so it was clear that a large portion of shareholders weren't happy with the job these members had been doing. Most analysts cite the $11 billion Autonomy purchase, and the subsequent $8 billion writedown, as the source of shareholder discontent.

What now?
The loss of an SVP during a turnaround is definitely a negative. He probably knows what H-P has planned for the future, and now that he's going to work on behalf of a competitor, he could use that knowledge against HP in some fashion.

The downgrade is also a negative, but much less of one. It's just one person's opinion and should be viewed that way. In the short term, the downgrade has already affected the share price and may put further downward pressure on the stock in the coming weeks, but it will ultimately have only short-term effects. A downgrade in no way has any impact on the overall health of the business, and long-term-oriented investors need to remember that.

As for the board shakeup, it's really a positive for all shareholders. Although investors themselves didn't vote the men out, their voice was definitely heard, and it seems clear that the board may now be acting in shareholders' best interests.

After reviewing the negatives and positives of the week, I believe they essentially balance themselves out. But that's not to say the stock won't still fluctuate dramatically over the next few days or weeks, or that I'd buy HP right now. The company still has a way to go to complete its turnaround, and I'd rather sit on the sidelines and let this one play itself out.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$31,928.62 (0.15%) $48.38
The Travelers Companies, Inc. Stock Quote
The Travelers Companies, Inc.
TRV
$173.91 (1.05%) $1.81
HP Inc. Stock Quote
HP Inc.
HPQ
$34.77 (-0.83%) $0.29
Dell Technologies Inc. Stock Quote
Dell Technologies Inc.
DELL.DL

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