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Hewlett Packard Stock, Warts and All, Deserves a Look Ahead of Potential Tech Rally

Investors may have a hard time forgiving Hewlett Packard (HPQ) for the series of ridiculous missteps that led to a 50% share price drop last summer. But now that the crises have passed, it’s also hard to overlook HP’s new status in the discount bin. HP is now the cheapest tech in the Dow; actually, the cheapest of almost any mega tech company.

The price makes HP shares particularly tempting because analysts are expecting a tech sector rally in 2012. Hedge funds have already slapped down big money on big tech, particularly those with balance sheets strong enough for some acquisitions. So with one of the biggest, financially sound IT companies now on sale, shouldn’t individual investors snag it? YCharts Pro gives HP perfect marks for fundamentals and considers its share price grossly undervalued.

To recap, however, HP shares reached this state of disgrace after numerous humiliating announcements since late 2010. Among them were: a sex scandal involving a CEO; the firing of the replacement several months later; the sudden abandonment of a big new product (its iPad competitor); the decision to sell off its PC division; followed quickly by the decision to keep it. Things calmed down considerably in September, when the board named as CEO former EBay (EBAY) chief Meg Whitman.

Distractions aside, HP’s general profile as a cheap-but-solid tech company has helped the shares recover a little lost ground lately. While there’s been no real rush for HP shares, it has attracted an outsized portion of the tech sector investment recently.

Hewlett Packard Stock Chart

Hewlett Packard Stock Chart by YCharts

These latest buyers have picked up shares for about 8.6 times historic earnings, which is almost as cheap as this, or any other big tech company, has been in a decade.

Hewlett Packard PE Ratio Chart

Hewlett Packard PE Ratio Chart by YCharts

HP’s latest figures show that it does, indeed, have reasonable debt levels and quite a lot of cash coming in. With a $55.5 billion market cap, HP’s $8 billion in cash on hand looks good.

Hewlett Packard Cash Operations TTM Chart

Hewlett Packard Cash Operations TTM Chart by YCharts

And while its latest earnings report wasn’t pretty, it was kind of impressive that such a mess of a company could pretty much maintain sales, even if profits suffered.

Hewlett Packard Revenues TTM Chart

Hewlett Packard Revenues TTM Chart by YCharts

With Whitman in control, HP has wisely backed off of grand plans. She promises a strong cash position but warns shareholders not to expect a major acquisition in 2012. She forecasts revenues and profits to decline this year, largely because of weak economies, but also because the company will focus on honing a business strategy to make the company more profitable from 2013 onward. She insists there will be no more surprises.

It’s understandable if investors don’t rush back to HP, as they have been burned more than once by unappreciated wackiness inside the company. (In 2006, for example, the board got caught spying on journalists.) With a dividend yield that usually stays below 1% (it’s about 1.7% now), shareholders get precious little consolation if Whitman finds she can’t keep her no-surprise promise.

But HP remains the largest seller of IT infrastructure and software in the world, and a quite profitable one at that. Imagine what the company could be without the distractions.

Dee Gill is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.

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