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3 Companies to Take Off the Scrap Heap

They're beat, they're battered, they're ... opportunities?

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I try to shelter myself from the storm when starting off a conversation with “But you know all the news might be out, and it could be just about time to get into that stock,” and today is no different.

Battered, beaten, ripped, embarrassed and generally crushed stocks are the hardest to make heads or tails out of, since you never know if it’s the beginning of an eventual turnaround or the last stage in a failure.

And nobody wants to admit to a failure, especially investors who don’t can’t bear to take their money out, ever optimistic of a turnaround. The idea of “opportunity cost” — taking out your money to reinvest somewhere else — also is difficult, as investors face the fear of regret in the event the original stock improves.

With battered stocks, you see a lot of similarities: poor management, inflexibility, lack of innovation … maybe a touch of hubris. But each case has its own ripples, which sometimes include signs of promise. Here’s three companies where maybe — just maybe — there’s a glimmer of hope. (But fair warning: If you agree it’s time to dip a toe into these stocks, watch out for a little ribbing from your colleagues.)

Hewlett Packard

InvestorPlace Editor Jeff Reeves’ personal whipping boy Hewlett-Packard (NYSE:HPQ) has so many ills … but the news is out there for all to see.

After an absurd number of changes in the front office, Meg Whitman is finally ensconced in the big chair, with her work cut out for her. The PC business is eroding, and HP said its PC business was down another 10% in the third quarter. While it still has a lead in laptop sales (16 million units between January and June), margins are slim and slimming. HPQ has given up on tablets, took a $10.8 billion charge in the last quarter (mostly on writing off its Electronic Data Systems purchase), and merging the PC business with the printer business is two wrongs not making a right. Worse: It’s using cash flow for the wrong reasons.

All that has led to nearly 70% losses since a multi-year peak in 2010, including 30% losses year-to-date. Plus, forward revenue and earnings estimates stink.

Here’s where the “but” comes in.

Hewlett-Packard has a huge installed base of operations and servers across so many sectors, including government, that it makes it unlikely they’ll be displaced anytime soon, even though that market also is slowing.

Despite its misuse of excess cash flow, Hewlett-Packard actually still has a cash flow, not to mention more than $8 billion still in the bank. Chris Lau at Seeking Alpha points out that HP’s software and networking revenues are growing, and the company continues to cut costs, upping the number of layoffs to 11,000 from an earlier 8,000 figure — and probably has more room to go on that front.

While Hewlett-Packard exited the tablet game, it understands that’s where the future is … and while it has no plans to make a more retail-geared tablet this year, it has said it will make an enterprise-focused tablet running Microsoft‘s (NASDAQ:MSFT) Windows 8. The company also is hoping the operating system will bolster its other hardware.

With a meager forward price-to-earnings ratio of 4, HP’s clearly a bargain on a valuation basis. And even if HPQ can manage to tread water, you’ll be rewarded with a 3%-plus dividend that seems in no danger of being taken out.

Article printed from InvestorPlace Media,

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