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Shares of HP (NYSE: HPQ) are in the spotlight – after Warren Buffett acquired a major stake.
Berkshire Hathaway (NYSE: BRK-B) scooped up an 11% stake in HP. And that means the position is valued at around $4.4 billion. That makes it one of Berkshire’s top 10 stock holdings.
Shares of HP popped 15% on the news last week.
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Why Did Buffett Buy HP Stock?
Let’s start by considering WHY Berkshire took a sizable position in HP.
HP was formerly known as Hewlett Packard. In 2016 the company split into two publicly traded stocks. Hewlett Packard Enterprise (NYSE: HPE) would focus on enterprise servers and services. And HP would sell computers and printers.
Warren Buffett loves buying great businesses at a cheap price. And that’s apparently what he sees in HP.
The HP business has experienced modest growth in recent years.
Yet the stock is dirt cheap – recently trading at $38 per share. Shares trade under 9 times earnings. On a valuation basis, that’s a 50% discount to the S&P 500!
Meanwhile… HP management has been very shareholder friendly.
The current dividend is 2.6% – and it’s increased by more than 50% in the last 3-years.
HP has also been aggressively buying back its stock. HP’s stock buybacks have reduced the number of shares by 25% in the last two years alone.
Plus, HP plans to spend $4 billion on stock repurchases in 2022. That could reduce the total share count by another 10%.
“We continue to believe the value of our shares is undervalued, and, therefore, that buying HP shares is a good investment for investors,” explained CEO Enrique Lores.
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HP: Buy, Sell or Hold
HP stock shot up to an all-time high on news of Buffett’s investment.
It appears that Berkshire was buying shares in early April between $34 – $36 per share.
HP shares are now trading around $38 – a slight premium to Buffett’s most recent purchase price.
Shares of HP remain cheap. Meanwhile, the company’s earnings should get a 10% boost this year simply due to the expected stock buybacks.
Here’s the bearish argument:
HP is in a low growth business selling PCs and printers. The company benefitted during the pandemic. That’s because more people were working from home and needed computers and printers. This boost in sales was temporary and the business will decline from here.
Here’s the bullish argument:
HP’s business will remain steady and could see continued growth. As offices re-open – companies will be upgrading computer systems and printers that have been dormant for over 2 years.
The management team is focused on creating shareholder value. They’re doing this through dividends and buybacks. Meanwhile, the stock is dirt cheap at less than 10 times earnings.
My view? HP shares are a BUY below $40.
The share price may settle down a bit after the Buffett hype fades from the news headlines. And it may be possible to scoop up shares in the mid-$30s, especially if the market has another panic attack.
The next big news for HP is earnings on May 26.
Investors who are bullish on HP could average into a position ahead of the earnings report.
HP stock is a safe and steady blue-chip tech stock. And it may deliver market beating returns in the coming months.
However, this stock isn’t going to deliver explosive profits over a period of years.
That’s why I’m also buying up the next-generation tech stock winners. And getting into these stocks could be like jumping into Apple, Google, or Netflix 10+ years ago.
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Yours in Wealth,
Ian Wyatt
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