Why It’s Time to Get Out of HP Inc. (HPQ)

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About a month ago, and after a year of anticipation, Hewlett Packard became HP Inc. (HPQ) and Hewlett Packard Enterprises Co (HPE), with the former owning the legacy printer and PC units of the old company and the latter focusing on enterprise hardware (hence the name).

Why It’s Time to Get Out of HP Inc. (HPQ)At the time, I was partial to HPQ and added it to the Value Authority portfolio. I noted the risks for both picks — including tough competition — but also noted that HPQ was quite cheap. Shares were trading for just 7.5 times projected November fiscal 2016 EPS estimates, which were $1.70 at the time.

I also felt strongly that there was room for improvement the following year as negative synergies from the split were reversed.

HPE was cheap as well, but it got saddled with debt post-split and didn’t boast quite the same potential when it came returning cash flow to shareholders.

Since we bought HPQ, shares indeed climbed. But recently, I decided it was best to pocket our profit and head for the exits despite the fact that we were only long HP Inc. for a few weeks.

Normally, our time horizon for Value Authority investments is longer … but in this case, the combination of recent stock gains and slashed earnings estimates undermined our main thesis for the buy.

 Sour Earnings Estimate for HPQ Stock

HP Inc. recently told investors that it expects adjusted earnings per share to tally between 33 and 38 cents — the high end of that range falling four pennies shy of the consensus. And on a GAAP basis, EPS should come to between 27 and 32 cents — the high end of which is six cents shy of the consensus.

For the full year of 2016 — when I expected synergies to be reversed and some cutting-edge technology like 3D printers to potentially provide a tailwind — the company actually slashed its guidance. Management said it expects to earn $1.59 to $1.69 a share excluding items, vs. the aforementioned consensus of $1.70. The lower end of the range was 7% lower than the consensus, while the value of HPQ’s stock had gained more than 7% since I was originally bullish and snagged some shares.

While a forward price-to-earnings ratio over 7 is hardly anything insane, it’s worrisome when you’re factoring in the general direction of both earnings and the broader PC industry. While I still don’t think PCs will disappear for some time, even a stable industry doesn’t necessarily translate to stock gains, considering the crowded tech landscape and rapid pace of change for tech.

Put another way, I really didn’t think HPQ had much more to offer us in the coming weeks or months … and so far, other investors seem to agree.

 Bottom Line for HPQ Stock

Since we sold HPQ at just over $14, shares have slumped below our initial buy price.

Yet by spotting shares when they were first on sale, we were able to pocket a sweet 7% profit in mere weeks.

And by keeping a cool head and considering new information, we were able to keep that profit with a quick sell.

Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader,Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media

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