A Pricey Prince of PCs

09/30/2009 12:00 pm EST


Andrea Kramer

Associate Editor, Schaeffer's Investment Research, Inc.

Andrea Kramer of Schaeffer’s Investment Research says Hewlett-Packard’s share price is bumping against stiff resistance, and with hardly in bear in sight, the stock could have plenty of room on the downside.

An optimistic article from the Motley Fool (“The Next Big Market for PCs?,” September 23rd) notes Hewlett-Packard's (NYSE; HPQ) potential to persevere overseas. The author cites a report in the Asia edition of The Wall Street Journal, which indicates that Chinese citizens are utilizing a massive $586-billion government stimulus program to purchase PCs—many of which are American. What's more, HPQ controlled 14% of the Chinese market during the first half of the year, and is slowly gaining ground on China-based rival Lenovo, which cornered 28% of the market share.

"Key to the gains is presence," opines Fool [writer Tim Byers], pointing to HPQ's some 7,000 stores and 10,000 resale partners in China. Furthermore, the tech titan is a popular advertiser and sponsor of a plethora of local events. And while HPQ has already established itself in the Chinese metropolises, the columnist claims that there's still plenty of room left to grow in "the hearts, minds, and wallets of China's new rural PC shoppers."

[But] while the untapped markets of China may be a plus for HPQ from a fundamental perspective, the stock still faces a few challenges on the charts. Though the equity has advanced 32% since the start of 2009, the shares of HPQ are approaching potential resistance in the $48-to-$50 region. This neighborhood contained the security's rally attempts during most of 2008, and could once again smack the shares lower. (The stock closed below $47.50 Tuesday—Editor.)

Plus, the stock's sentiment backdrop sparks concerns regarding a lack of potential sideline money. The Street is already bullishly biased toward HPQ, as the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.53 ranks in the fourth annual percentile. In other words, short-term option speculators have been more optimistically aligned toward HPQ only 4% of the time during the past year.

What's more, according to Zacks Investment Research, the stock already harbors 12 Strong Buys and three Buy ratings, compared with only five lukewarm Holds and nary a Sell in sight. On that same note, Thomson Reuters pegs the consensus 12-month price target on the shares at $51.87—in territory HPQ hasn't explored since late 2007.

In conclusion, with hopes for HPQ already sky-high, the stock may have trouble attracting additional buyers to the table. Furthermore, should the $50 area smack the equity lower, the bulls could get spooked. A reversal in sentiment among option traders, or a round of downgrades and/or price-target reductions, could place selling pressure on the prince of PCs.

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