Does Hewlett-Packard Belong in Your Portfolio?

With shares of Hewlett-Packard (NYSE:HPQ) trading around $27, is HPQ an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Hewlett-Packard provides products, technologies, software, solutions, and services to individual consumers, small and medium businesses, and large enterprises worldwide. The company offers commercial notebooks and desktops, consumer notebooks, desktops, software, and services for the commercial and consumer markets. The services segment provides consulting, outsourcing, and technology services to infrastructure, applications, and business process domains. The diverse technological products and services offered by Hewlett-Packard make it a leading provider that sees increased demand through global expansion.

Investors who have been chasing after the social networking stocks may have missed out on an old technology giant, Hewlett Packard. The company’s stock has gained more than 90 percent in the last 12 months. HP’s rebound has been propelled by a string of measures taken by the company’s new leader Meg Whitman to streamline operations — laying off thousands of employees, cutting prices for mature products, and placing more emphasis on enterprise products that have been an area of strength.

T = Technicals on the Stock Chart Are Strong

Hewlett-Packard stock has performed well over the last several months. The stock is currently trading near highs for the year and looks poised to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Hewlett-Packard is trading above its rising key averages, which signal neutral to bullish price action in the near-term.

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Hewlett-Packard options may help determine if investors are bullish, neutral, or bearish.

	Implied Volatility (IV)	30-Day IV Percentile	90-Day IV Percentile
Hewlett-Packard options	33.06%	10%	8%

What does this mean? This means that investors or traders are buying a minimal amount of call and put options contracts, as compared to the last 30 and 90 trading days.

	Put IV Skew	Call IV Skew
December Options	Flat	Average
January Options	Flat	Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a minimal amount of call and put option contracts and are leaning neutral to bullish over the next two months.

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On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Hewlett-Packard’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Hewlett-Packard look like and more importantly, how did the markets like these numbers?

	2013 Q3	2013 Q2	2013 Q1	2012 Q4
Earnings Growth (Y-O-Y)	-120.93%	-14.00%	-31.25%	-13.70%
Revenue Growth (Y-O-Y)	-2.77%	-8.23%	-10.14%	-5.58%
Earnings Reaction	9.04%	-12.45%	17.09%	12.28%

Hewlett-Packard has seen decreasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Hewlett-Packard’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Hewlett-Packard stock done relative to its peers, Dell (NASDAQ:DELL), IBM (NYSE:IBM), Apple (NASDAQ:AAPL), and sector?

	Hewlett-Packard	Dell	IBM	Apple	Sector
Year-to-Date Return	93.26%	36.69%	-7.82%	5.22%	32.83%

Hewlett-Packard has been a relative performance leader, year-to-date.

Conclusion

Hewlett-Packard is a software an technology bellwether that provides essential products and services to consumers and companies worldwide. The company’s stock has gained more than 90 percent in the last 12 months. The stock has been moving higher in recent months and is now trading near highs. Over the last four quarters, earnings and revenues have been declining. However, investors are pleased with recent earnings announcements. Relative to its peers and sector, Hewlett-Packard has been a year-to-date performance leader. Look for Hewlett-Packard to OUTPERFORM.