HPQ looks cheap under $15, but does it hold up to Berman’s stress test? The history of markets is littered with companies that looked “cheap” until they looked cheaper – until they went bust.
You can’t go long or short on HPQ without reading this detailed analysis of Hewlett-Packard’s business. Also in this issue you’ll find Berman’s take on Citigroup, Bank of New York, UPS, and Johnson & Johnson. Read the eleventh edition of the The Berman Value Folio. Powered by Berman’s keen insight and Trefis’s interactive modelling, the Folio’s portfolio is up 19.4% since inception just ten months ago.
Portfolio Manager James Berman, president and founder of JBGlobal.com, guides you through his fundamentals driven investment rationale for specific companies. Berman relies on Trefis analysis and modifiable tools to summarize his outlook and invites readers to use these tools to challenge his rationale or create their own views on stocks.
Hewlett-Packard: Value Trap or Hidden Oasis?
By James Berman
The “value trap” is the long-term investor’s worst nightmare: a quietly imploding company disguised as an irresistible bargain.
While traders worry about wrong-headed directional bets and margin calls, the value investor lies awake fretting whether the deal of a lifetime is really a sack of something else. The history of markets is littered with companies that looked “cheap” until they looked cheaper —until they went bust. Whether it was Digital Equipment in the ’80s or Kodak over the past 15 years, such traps can produce shocking tales of prolonged value destruction.
Value traps are not exclusive to the tech sector, but they tend to cluster there. The ever-shifting tech landscape is a common place to see value “mirages”: companies that trade at p/e ratios of 5 or less, at free cash flow yields exceeding 20%, where the business model is slowly disappearing. All the while, the company spouts endless trickles of cost-cutting and re-jiggering, which investors lap up like thirsty desert travelers—until it all turns to dust on their lips.