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HP is a Screaming Buy

February 24, 2011 – by Richard Band

After a mighty long wait, the global oil scare is shaking some of the bulls out their complacency. As these “weak hands” drop their stocks, we’re standing by to pick up the bargains.

Yesterday’s trading may have marked a watershed of sorts. Oil and gold were both sharply higher for most of the session — until about 2 p.m. EST, when a rumor (supposedly originating on Twitter) began to spread that Libyan dictator Moammar Khadafi had been shot.

Untrue, as far as I can determine. However, the story was enough to knock the legs out from under both commodities. (Silver, too.) Gold mining shares ended the day near their lows, off about 3%.

When a mere rumor — false at that — can hammer a market, you know there are a lot of nervous, highly leveraged speculators holding positions they don’t really believe in. These folks are the first to panic when the tide turns against them.

I’m not a geopolitical expert. I don’t claim to know how the Libyan affair will ultimately be resolved. I can tell you, though, that today’s market action is typical of the last stage of a trend, just before a dramatic reversal.

I wouldn’t rule out one more spike in oil, perhaps as high as $105-$110 a barrel. But a powerful reversal is coming soon. Bonds will love it, and so will most stocks (except resource issues, of course).

On the stock side, I advise you to take advantage of Wall Street’s shortsighted overreaction to Tuesday’s earnings report from Hewlett-Packard (NYSE: HPQ). The more I study HPQ’s latest results, the more encouraged I am.

This outfit is generating prodigious free cash flow. I estimate that HPQ’s cash flow, net of capital spending, will amount to approximately $11 billion this fiscal year (ends Oct. 31). That’s about 12% of the technology titan’s market value at Thursday’s close — an incredibly high FCF yield, more than double that of an investment-grade corporate bond.

HPQ is throwing off so much cash that the company retired 7.5% of its outstanding shares in the past year alone — 176 million shares, shredded and burned. Again, a spectacular figure.

Give Leo Apotheker, the new CEO, a couple of quarters to show his stuff. I think we’ll see HPQ 25%-30% higher within a year. Pay up to $46.