Paul Sakuma
The slide in Hewlett-Packard Co. on Tuesday delivered a painful lesson to investors who like to scoop up stocks that are suffering through some short-term issues: Those issues can take a lot longer than expected to work through, and cheap-looking stocks can get cheaper in the process.
The shares were down a wow-inducing 9 per cent in late-morning trading on Tuesday, after the computer-maker delivered some bad news with its quarterly earnings. While those earnings beat expectations, investors were clearly focused on the future. HP's chief executive warned of another bad quarter ahead, and the company cut its earnings guidance for 2011 to $5 (U.S.) a share, down from earlier guidance of $5.20 to $5.28.
Eddy Elfenbein at Crossing Wall Street had this to say: "Investors tend to think companies are like athletes and they can shake off a bad night. Business generally doesn't work that way. One problem leads to another problem and things can escalate very quickly."
He had warned readers away from HP in February, despite the temptingly low price-to-earnings ratio of the stock. Back then, HP had plunged nearly 10 per cent after reporting disappointing quarterly sales and guided lower for the current quarter's sales and revenues.
Now, the damage is really starting to add up. Since February, the shares have fallen a total of more than 26 per cent, and are currently trading close to a two-year low. And about that earnings multiple: It sits at just 6.9-times estimated earnings and 8.1-times trailing earnings. That's the lowest valuation since March 2009, when the S&P 500 hit a 12-year low amid the financial crisis and recession.
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