Did Hewlett-Packard Punk the Market This Week?
Another record high for U.S. stocks, as the benchmark S&P 500 rose 1.2% this week, to close above 1,900 on Friday for the first time. The narrower Dow Jones Industrial Average gained 0.7%, with the technology-heavy Nasdaq Composite Index was up 2.3%.
One of the big movers this week was Hewlett-Packard (+3.7%), which announced its fiscal second quarter results as it reaches the midway point in CEO Meg Whitman's five-year turnaround.
Mea culpa: I was wrong on Hewlett-Packard! In commenting on the Silicon Valley stalwart's fiscal second quarter results on Thursday, I wrote:
From excessive pessimism, [investors] may have swung to an excess of enthusiasm - today's drop is a correction, and today's results (and outlook) may have halted the shares' positive momentum until investors get evidence of new momentum in the business.
I had expected that the stock price action in Thursday's after-hours session, during which HP shares didn't do much of anything, would be predictive of Friday's stock market reaction, as is often the case for high-profile end-of-day earnings releases. In fact, investors had already had an early chance to react to the results during Thursday's regular trading session, when part of the release was mistakenly posted on Hewlett-Packard's website at approximately 3:28 p.m. ET on Thursday. The stock, which was in positive territory when the results leaked, closed down 2.3% on Thursday.
The market went on to prove me wrong on Friday, as the shares shot up 6.1%, recording a new 52-week high in the process. Perhaps I would have expected this, had I looked at the stock market's next-day reaction to Hewlett-Packard's prior six earnings releases since the shares bottomed in November 2012. (The next day return is the appropriate measure, as HP releases its earnings after the market's close.) As the following table illustrates, significant stock price moves appear to be the norm:
Earnings Release Date + 1 Day
Hewlett-Packard 1-Day Stock Price Return
May 23, 2014
Feb. 21, 2013
Nov. 27, 2013
Aug. 22, 2013
May 23, 2013
Feb. 22, 2013
Nov. 21, 2012
Interestingly, the shares bottomed on Nov. 20, 2012 -- immediately before the announcement of the fiscal fourth-quarter results.
The magnitude of those returns illustrates, in a somewhat fluid chronological order:
- The depth of the pessimism that was weighing on the stock when it bottomed.
- The uncertainty attached to the turnaround.
- Finally, some positive surprises as the turnaround appears to gain momentum, particularly for Q4 2013.
Nevertheless, Friday's return overstates the positive reaction to HP's results: If we use as a reference price the stock price just before the leak on Thursday -- roughly $33 -- the actual stock market reaction through Friday was just +2.2% -- a positive reaction, certainly, but less than Friday's 6.1% "pop" would suggest.
Call me a cynic or call me appropriately skeptical, but I think the stock, which had bottomed under the weight of excess pessimism, may now have gotten ahead of the company's turnaround. Investors continue to expect organic revenue growth from the company, which the company (once more) failed to deliver in the last quarter. Delivering it over the next several quarters is no sure thing, either; as such, shareholders can probably look forward to more volatility in the stock.
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The article Did Hewlett-Packard Punk the Market This Week? originally appeared on Fool.com.Alex Dumortier, CFA, has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Cisco Systems and owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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