Sanford Bernstein’s Toni Sacconaghi this afternoon writes that Hewlett-Packard (HPQ), the cheapest stock in the S&P 500 currently, has very few precedents in the history of tech stocks for such cheap valuation.
At 4.9 times projected earnings, HP is in a class by itself as far as tech:
Prior to this month, not one tech stock with a market cap of >$5B has traded at less than 5.5x earnings in the last 20+ years. In fact, ex financials, only 19 stocks with market cap above $5B have traded below 5.5x since 1990 (of which nearly half were in the cyclical energy sector), and only 5 stocks with a market cap over $20B have traded that low.
With a free cash flow yield projected at 20% (relative to market cap) this year, a 2.1% dividend yield, and a weighted average cost of capital, the stock looks even more cheap, writes Sacconaghi.
Sacconaghi’s conclusion is that the stock is “overly discounted,” being treated as if it were a “broken” company, when in fact it is not.
“We believe that the stock’s valuation is overly discounted due to part to investors’ exasperation with recent management and the Board,” he concludes, “and believe the stock offers very attractive risk reward for patient investors.”
Sacconaghi reiterates an Outperform rating on the shares and a $37 price target.
HP today closed up 89 cents, or 4%, at $23.60.
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