Buy Hewlett-Packard Before Earnings

November 3, 2009

Welcome to another edition of Stock of the Week, a FREE weekly eletter where I give you my in-depth analysis on the stocks that matter to you most—with no mysteries and no strings attached. This weekly message will arrive in your email box every Tuesday after the market closes. (View complete Stock of the Week archive here.)

Today, I want to share with you one of my favorite tech stocks to buy now—Hewlett-Packard (HPQ). Shares have almost doubled since the March lows, and set a new 52-week high in October. But my latest fundamental analysis of this company shows it has great cash flow, margins and sales behind it that should power even bigger returns. (View my free stock report on HPQ here.) In fact, Hewlett-Packard’s upcoming quarterly report on November 23 is a perfect chance for the company to win big buying pressure that fuels sustained gains through the end of the year and into 2010!

After some volatility on Wall Street recently, now is a great buying opportunity for investors who want a piece of Hewlett-Packard before it takes off again. I know some of you are afraid of buying a stock near its 52-week high, and not without reason. No one wants to purchase a company at its peak, but I am confident that HPQ is far from the top of its run—and I’ll prove it to you by contrasting HPQ with fellow tech pick Logitech (LOGI). This computer peripherals company has also nearly doubled since the March lows, but unlike HPQ, it has struggled mightily just to be profitable.

Stocks of the Week
Hewlett-Packard (HPQ)	Logitech (LOGI)
Current price: $47.51	Current price: $17.24
52-week high: $49.20 (intraday 10/23)	52-week high: $19.76 (intraday 10/22)
52-week low: $25.39 (intraday 3/9)	52-week low: $7.55 (intraday 3/9)

Logitech Lacks Sales

Logitech (LOGI) is a good cautionary tale. The company’s products include PC speakers, keyboards, webcams and other high-tech gadgets. LOGI is very dependent on the American consumer, and that’s why the company is feeling such a squeeze right now. Let’s look under the hood by checking out this stock’s current strength and future growth potential:

Current Strength: It’s been a rough year for Logitech as consumers have heavily reduced spending. In the fourth quarter of 2008, LOGI missed earnings by almost 50%. In the first quarter of 2009, the company swung to a loss of 20 cents a share—tallying a -433% earnings miss! The company was still in the red in its Q2 report, and has only recently struggled back to profitability. Shares have been riding the strength of the tech sector for the past few months, but there have been few signs of strength from LOGI’s balance sheet. The company did manage to top the Street’s rather low expectations with its recent quarterly report, but it lowered guidance for its current revenue estimates to a range of just $575 million to $595 million—down more than 50% from a year ago.

Future Outlook: One thing that Logitech does have going for it is that the company is headquartered in Switzerland, and the Swiss franc is currently trading very strongly against the dollar. This is boosting corporate profits due to favorable exchange rates. Also, LOGI was upgraded by UBS at the end of October to buy from neutral based on increased cost efficiency.

The Verdict: I never advocate risky bargain-hunting by chasing stocks before they’ve proven themselves. While LOGI may be on the upswing, the bottom line is that the company’s sales and profits are still drastically down over where they were a year ago and I’m not comfortable that Logitech has hit bottom yet. So I rate this company a “hold,” meaning I don’t want you to buy until further signs of improvement appear.

Clearly the severe drop in consumer spending has hurt Logitech. But as you’ll see with Hewlett-Packard, this trend has not held back all computer companies.