When Do You Buy HP?

 | Aug 23, 2011 | 9:30 AM EDT
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HP (HPQ) is perhaps the biggest Dog of the Dow these days.

The stock is down 43% year-to-date and seems to be universally hated at the moment after announcing plans to spin off its PC division, shut down its WebOS efforts, and buy a billion-dollar-a-year business for $10 billion.

So, after investors threw in the towel last Friday, should you look to buy in for a dead cat bounce?

No. There's still just too much risk tied up in HP.

The stock is likely in the dog house for at least the next six months, much the same way that Google (GOOG) was earlier this year after the company announced that it was replacing Eric Schmidt with Larry Page. 

In my view, you can expect a further slippage in the stock for the next three-to-four weeks, followed up by five months of relative flatness.  Over that period, you'll likely hear of key executives leaving the firm (like Todd Bradley, who heads up their PC division called PSG), as well as some further rank-and-file job cuts. None of that is going to prop up the stock.

I think you're also likely to hear about some more billion-dollar acquisitions in the coming months. If the HP board has done nothing, it's shown that they are not afraid to keep doubling down on a strategy, even if the mainstream media disapproves.

What will be the catalysts for buying in to the stock again? 

Look for a deal announced for the PC division. Some think this is going to take up to a year. I expect it will be sooner as the HP board is feeling the pressure to make something happen.

Look for a deal to sell the Palm group and its patents. I haven't seen anyone quote the raw number of patents received by Palm in the mobile space but the final price tag for these will likely be high. The price could be close to the Nortel (NT) bid price and that could wake up investors to HP's stock again.

Of course, overly strong earnings would help as well, but that's still likely over a year away.

The bottom line: look again at HP in January. Until then, consider it a falling knife.

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