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The Dow’s 2 Best and 2 Worst Stocks

The Dow's hotter than a pistol so far in 2013

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Worst Performer: Hewlett-Packard

HPQIn some ways, it’s tougher to pick the losers than the winners. That’s because over the past 48 years, the S&P 500 (I borrowed this stat from Buffett’s annual letter and he uses the larger index) has risen on 37 occasions, or 77% of the time. By going negative, you’re naturally swimming against the tide. But I digress.

My first loser is Hewlett-Packard (NYSE:HPQ). It’s up 48% year-to-date through March 11, reversing a three-year losing streak that saw its stock drop 57% since the end of 2009. I’m taking a chance here because reversion to the mean seems to be setting in; over the long haul, its stock has seen mediocre returns.

Vitaly Katsenelson, chief investment officer for Denver-based Investment Management Associates, makes a compelling argument why Hewlett-Packard is an attractive investment. While he’s right to point out that HP generates $5 billion in free cash flow and CEO Meg Whitman is making a concerted effort to reduce its debt position, it has a long way to go both financially and operationally before it can move up into the 30s.

In November, Moody’s lowered HP’s long-term credit rating from A3 to Baa1, affecting about $25 billion in debt. The ratings agency suggested this revision would likely remain in place for at least 18 months, raising the rating only if it could demonstrate steady organic revenue growth, EBIT margins above 9% and adjusted debt no more than 1.5 times EBITDA. Currently, HPQ is nowhere near any of those three targets. To meet and exceed these numbers, it will have to deliver a strong 2013, and I just don’t see that happening.

With much of its gains YTD secured in the past month, I see little gas left in its tank. Any bad news, and Hewlett-Packard is sunk.

Article printed from InvestorPlace Media,

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