When Bill Hewlett and Dave Packard founded Hewlett-Packard in Palo Alto, California in 1939,
founder Warren Buffett was eight years old. Eighty-three years later, Buffett added
to its long list of legendary investments.
Berkshire (ticker: BRK.A) last week disclosed an 11.4% stake in PC and printer company HP (HPQ), which should not be confused with
Hewlett Packard Enterprise (HPE)
the server, networking and storage company it spun off from in 2014.
You could say Berkshire is a little behind here. HP’s PC business has soared during the pandemic, driving growth to the highest level since the company was split in two; HP’s share price has doubled since 2019. Meanwhile, there are signs PC demand will slow from here as the stay-at-home trend fades. Analysts at Goldman Sachs, Morgan Stanley, UBS and Barclays have all become cautious of the PC sector for this reason.
Like Barrons repeatedly noted, HP shares are cheap by almost all statistical measures. In an October 2021 column, I described them as a “screaming buy”. (I’d like to think Buffett read the column.) Even after the stock rose 15% last week on the Buffett news, HP shares are still trading for a modest nine times expected earnings for the fiscal year. of October 2023, and only 0.7 times Sales. And HP remains extremely shareholder-friendly: Over the past eight quarters, it has repurchased 26% of its stock and has promised to repurchase at least $4 billion of stock in the current fiscal year. The stock has a dividend yield of 2.8%.
For the first time in years, HP also has a growth story to tell, thanks to the surging demand for PCs during the pandemic. Even though the company’s business printer business slowed during office closures, demand for home printers soared.
As the pandemic boom may fade, HP CEO Enrique Lores is expanding the company’s product portfolio to include a wider range of businesses. HP spent $425 million last year to buy the HyperX gaming peripheral unit from memory maker Kingston Technology. A leader in gaming headsets, HyperX also sells keyboards, mice and microphones.
Then in late March, HP agreed to buy the headset and audio conferencing company
(POLY) for $3.3 billion. It’s a straight play on the future of hybrid working.
Even so, major Wall Street firms are taking a bearish view of HP. Morgan Stanley analyst Erik Woodring, who recently downgraded his rating on HP shares to an equal weight underweight, thinks consumer spending on hardware will come under pressure as supply improves, prices fall and demand normalizes, and he sees macroeconomic risks to business demand. UBS analyst David Vogt on Friday cut his HP rating to Neutral instead of buying, citing slowing demand for PCs, the potential for slower buybacks and considerable share price appreciation.
Paul Wick, portfolio manager of the Columbia Seligman Technology and Information fund, which owns HP shares, thinks Wall Street is missing the big picture.
“We’ve been huge fans of Hewlett-Packard and CEO Enrique Lores, who has executed extremely well,” Wick told me during an interview for our Barrons Series of live interviews last week. He admits the PC business will be flat, but sees a shift to more profitable business models from cheaper consumer units. And he says the printing press is recovering.
Wick thinks HP can earn $5 a share in fiscal 2024, up from $3.79 in 2021. Buybacks reduce the number of shares quarter after quarter, he notes. “It’s not a sexy company, but it’s better than people give it credit for.”
Berkshire’s big bet on HP is a good reminder that now is the time to hunt for more tech bargains, especially as interest rates rise. In order to find good candidates, I selected technology stocks in the
trading at less than 10 times projected Wall Street earnings for next year. It’s a small group that includes both HP and HP Enterprise, the IT services company
(DXC), both hard drive stocks
(WDC), and a handful of chip names, including
(MU), which I talked about on the rise last week, and mobile phone radio chip companies
Some of these chip names are part of a new actively managed exchange-traded fund just launched by Wick.
Columbia Seligman Semiconductor & Technology
trades under the symbol SEMI and should be a good way to play on both cheap technology and continued strength in the chip world.
“Semiconductor fundamentals are strong and valuations are reasonable – much more reasonable than other parts of the technology, and even relative to the broader market,” Wick says.
Micron happens to be one of Wick’s top picks; he is also optimistic about
(INTC), which he says is far more attractive than more popular (and expensive) options like
Advanced Micro Devices (AMD)
(NVDA). He’s also bullish on optical networking games, including
(VIAV) and the enterprise storage company
They all benefit from increased data center spending.
I guess Berkshire won’t wait decades to invest in its next Palo Alto-based tech company.
Write to Eric J. Savitz at [email protected]