Event: HPQ will report their fiscal Q3 earnings tonight after the close. The options market is implying a one day earnings move of about 9% vs the trailing 4 qtr avg move of 12.30%.
Sentiment: Wall Street analysts are still relatively bearish on the stock despite its 75%+ gain in 2013. They have 8 Buys, 19 Holds and 7 Sells, with the 12 month price target of $25.61 right its current stock price. Short interest is around a 1 year low, at only 2% of float.
Options Open Interest: Open interest is skewed about 1.25 to 1 to the puts vs. the calls, another indication of the relatively negative sentiment surrounding the name. Recent options activity has been about evenly split over the last month. Largest open interest (and most active line in the past 2 weeks) has been the Sept 25 put.
Price Action / Technicals: HPQ has been the best performing stock in the S&P top 100 so far in 2013, up 79% year-to-date. It has been a stair-step higher, building subsequent bases and launching time after time:
I’ve drawn the red line at the $26 level, which has failed today along with the 50 day moving average. But with the event tonight, the stock could go either way here (it’s been a very big mover on earnings over the past year). The key levels to watch are support around the June low near $23, and resistance at the year’s high around $28.
Fundamentals: Enis wrote a Name That Trade post on HPQ last month, in which he summed up his view of the fundamental backdrop for the stock:
In sum, while management has done an admirable job cutting costs, that likely has come at the expense of future growth. Moreover, given the stock’s rally so far this year, the valuation discount that was appealing as a cash flow story no longer holds the same attractiveness. Analysts project around $3.50-$3.75 of annual earnings over the next 2 years, and a 8-10x P/E multiple would put the stock around 30-35 in 2 years. That’s the optimistic scenario though, particularly since HPQ is in the worst end markets of the technology sector.
We think HPQ is a value trap – just a question of when the market comes around to that view as well.
Vol Snapshot: As you can see in the 1 year chart, IV30 has shot up into the event and now stands around 50, which is the highest it’s been over the past year:
September vol will get hit hard after the event and will settle in the low 30’s. Any trades in the name must take this into account.