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Hewlett Packard: A Perfect Value Stock

According to the valuation methods of Benjamin Graham in The Intelligent Investor, this stock is the ideal value opportunity

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Dec 22, 2021
Summary
  • Below book value
  • Low price-earnings ratio
  • Dividend-paying
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If your model for value is the one described by Benjamin Graham in his classic work on the subject, "The Intelligent Investor," then Hewlett Packard Enterprise (

HPE, Financial) seems to qualify. According to Graham, investors should look for a low price-earnings ratio, a low price-book ratio, a record of positive earnings, dividends and low debt.

You won't find many stocks like that in 2021 what with the Shiller price-earnings ratio of the S&P 500 up there at 39. That’s the second highest it’s ever been. While others in the index are going for eye-popping, absurd price-earnings ratios, Hewlett Packard is sitting with a price-earnings ratio of 5.89. The forward price-earnings ratio is 6.92.

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The communications equipment manager is making money, too. This year’s earnings per share increased at a 43% rate. The five-year EPS growth rate is 6.7%. Wall Street's expectation for the next five years of earnings per share growth is 17.77%. Hewlett Packard’s price-to-free-cash-flow ratio comes in at 5.97.

Investors are being paid a dividend of $0.48 per share for an annualized yield of 3.18%, which most definitely exceeds that being paid by the U.S. Treasury’s 10-Year Note as well as the S&P 500's average. Risk factors are a bit different, of course, but it’s worth noting for comparison’s sake.

Hewlett Packard’s long-term debt is about half of shareholder equity. The cash-debt ratio is 0.27, the debt-to-equity ratio is 0.73 and the debt-to-Ebitda ratio is 2.47. The stock is trading for only 98% of its book value right now.

The GuruFocus summary of Hewlett Packard’s financials finds four good signs, nine medium signs and one severe warning sign. That many warning signs is higher than most similar equities and suggests that there are reasons why it’s so unloved that it now trades below book value.

Whatever the case, it’s highly likely that this stock is now showing up on the screens of those large institutions that seek to locate value rather than hyper-growth. With an average daily volume of about 11,300,000 shares, it’s relatively easy for big money funds to trade in and out, given the massive liquidity.

For example, according to SEC filings, certain legendary hedge fund managers have been buying the stock, including

Paul Tudor Jones (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and Steven Cohen (Trades, Portfolio), who are new investors in the stock as of the end of the third quarter of 2021.

Hewlett Packard has a market capitalization of $19.51 billion and an enterprise value of $30.09 billion. There are not many opportunities on the New York Stock Exchange to pick up a stock that meets the basics of the Benjamin Graham investment model. Many equities in the communications and tech sectors are way overvalued if you go by his most basic requiremennts. Hewlett Packard, however, fits the bill.

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I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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