Hewlett Packard Enterprise: The Long Case

On the last day of the quarter, Wells Fargo analyst, Aaron Rakers, was out with a bullish note on Hewlett Packard Enterprise (NYSE: HPE). This was a gutsy move on a company whose stock had fallen more than 50% from November through two weeks ago and was trading within a dollar of its all-time lows. However, the analyst took a longer-term view and argued that the company’s ability to capture market share in the enterprise computer space, in the wake of a coronavirus driven technology shift, makes them an attractive stock to buy and hold. The company’s rating was raised from Equal Weight to Overweight while a $14 price target was slapped onto its stock.

Considering shares were changing hands below $8/share at last month’s low, long term investors would do well to sit up and take notice.

Beaten Down

Given that HPE shares have been trending down since November while the S&P 500 was printing regular all-time highs, there obviously had been some pessimistic sentiment creeping into the share price. As markets were slammed in what was the worst Q1 in history, HPE took it’s beating in turn. Many eyebrows were raised and fingers pointed at the company’s heavy leverage but Rakers has pointed out that this is too simplistic a criticism. The company’s $12 billion of debt is mostly tied to its HP Financing Services operating segment and so has a strong portfolio backing it up. In a note to client he said, "while our estimates reflect our expectation that HPE will face significant fundamental pressures, and we would fully expect ongoing investor questions/concern over the impact of enterprise workload migrations to public cloud, we believe this is more than adequately discounted in our adjusted estimates and the current valuation".

In essence, the stock price has been unfairly beaten down and investors are getting a bargain at these prices.

Many of us will remember first coming across the Hewlett Packard brand and logo on some of the first mainstream personal computers to hit the market in the early 1990s. In the years since, the company has undergone many changes and pivots, all the while adapting to new technology. In 2015, the company was split up into HP Inc. (NYSE: HPQ) and Hewlett Packard Enterprise (NYSE: HPE). The former kept the original company’s ticker and stock price history and had its business centered around PCs and printers. The latter was focused on the enterprise product business and financial services offerings. As we continue the march into a new decade, HPE generates revenue from some of the most modern technologies of today that are a crucial part of many other companies’ tech stacks. Think data storage, networking solutions, servers, information management, data security and digital investment consulting.

Technicals Are Strong

In the four years since the split, through the end of 2019, the two HP stocks were largely correlated in their movements. The fact that they’ve since diverged might give Wall Street another reason to consider the long case. Since the start of 2020, HPQ shares are down 18% while HPE shares are down 37%. It might be a simplistic argument to make but in tandem with the value and opportunity being espoused by Rakers, the risk/reward skew for HPE is definitely attractive here.

Shares have strong support around the $8 level where buyers consistently stepped in back in 2016 and last month. The stock’s RSI has also moved out of the teens, suggesting that the current wave of selling is sputtering out while the MACD had a bullish crossover last week, confirming that the bulls have started to take control for now at least. The cherry on top is that there’s also an attractive 4.9% dividend yield to keep investors happy while the stock continues its recovery.