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Hedge Funds Are Selling HP Stock Prematurely
Stock Analysis & Ideas

Hedge Funds Are Selling HP Stock Prematurely

HP (HPQ) provides software and hardware computer products. The firm operates through three segments, including Personal Computing, Corporate Computing, and Corporate Investments. I am bullish on the stock.

Hedge Fund Selling

According to TipRanks’ 13-F filings tool, hedge funds have shed a lot of weight on HP stock with 7.6 million shares having been sold in the previous quarter.

Notable hedge fund managers who cashed out on the stock include Joel Greenblatt and Ray Dalio who reduced their positions by 10.43% and 57.13%, respectively.

Hedge Fund selling is a useful indicator of short-term stock price movements because they actively manage portfolios to take advantage of price discrepancies in the near term.

Having said that, I believe that hedge funds have jumped the gun by selling HP stock; based on a top-down analysis, I found a significant amount of value in store, which could materialize in 2022.

Why HP Stock Still Holds Value

HP finished last year on a strong note after easily topping its Q4 earnings expectations amid a 25% rise in commercial PC sales. The hybrid work from home solution is set to sustain the surge in PC and printer sales for the duration of the year, as many corporations have realized that distance working could be permanent.

Furthermore, the global economy is hot at the moment, with Goldman Sachs predicting 3.8% global growth for 2022, and to add substance to the statistic, Jamie Dimon of J.P. Morgan recently stated that we could be in for the largest economic expansion in a decade.

With GDP growth being positively correlated to stock market returns, I wouldn’t put it past HP to add to its sales in 2022, considering its strong market position.

The final and perhaps most vital matter to consider when analyzing HP stock is its market price versus its justified fair value. I enjoy using the price-to-sales ratio to analyze stocks with rapidly expanding growth variables, as it is less susceptible to topline volatility.

I calculated the stock’s fair price-to-sales ratio to be 3.22 by dividing the relevant residual sales margins and residual earnings terms by the demanded investor and company growth differential.

Considering HP is trading at a P/S ratio of 0.74, it’s safe to say that we’re looking at an undervalued stock, especially if it’s considered that the company’s earnings growth is outpacing the stock’s price by 25x, conveyed by its PEG ratio of 0.04.

Wall Street’s Take

Turning to Wall Street, HP has a Hold consensus rating, based on two Buys, five Holds, and one Sell assigned in the past three months.

The average HP price target of $36.75 implies 6% downside potential. The downside potential could be because many analysts are yet to revise their price targets for the new year, which could change the outlook.

Concluding Thoughts

HP stock has been sold by a few hedge fund managers with some severe magnitude. However, if we look at the business’ characteristics, its sales alignment with economic growth, and the stock’s valuation metrics, it’s safe to say that HP remains in good shape.

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