Why Do Hedge Funds Love Dell More Than Hewlett-Packard (HPQ)?

Page 1 of 2

Last quarter we saw Dell Inc. (NASDAQ:DELL) pass Hewlett-Packard Company (NYSE:HPQ) in our hedge fund ownership rankings, which include 400 of the world’s most preeminent hedge funds. For 3Q, Dell had 42 funds invested after a net increase of 4 filers. Meanwhile, HP saw a net decrease of 5 filers and now only has 40 big-name funds owning the stock. Ray Dalio, billionaire and founder of Bridgewater Associates, loves both Dell and HP, and increased his stake in each by double-digits last quarter (see Ray Dalio’s other top picks here).

BRIDGEWATER ASSOCIATES

Dell reported so-so 3Q results, missing the Street’s EPS estimates by 2.5%. Top line revenue and operating income took large hits, which have pushed shares of the company down by nearly 15% over the past six months. The big fundamental problem for Dell and HP has been the cannibalization impact that smartphones and tablets have had on PCs. Couple this with a weak economic backdrop that has led to low IT spending, and it is easy see why both PC makers are down at least 25% year to date.

Acquisitions will be one of the big differentiators for HP and Dell. Inorganic growth continues to help Dell diversify its operations to a greater degree than HP. In layman’s terms, Dell’s acquisitions involve moving away from the computer-making business and embarking into the software industry. Part of this initiative has already been put in place with the recent acquisition of Quest Software for $2.4 billion. Dell hopes to also pivot its PC business to products with higher growth potential, which include tablets and ultrabooks. One recent innovation of the company has been its release of a ultrabook-tablet combo, the XPS 12.

HP, meanwhile, is expected to see revenues down 10% in FY2013. The company has already announced restructuring plans that have forced its long-term expected earnings growth rate to essentially zilch. Restructuring initiatives should save HP upwards of $3.5 billion, but not until after 2014. Billionaire Jim Simons is one of Hewlett’s biggest backers (check out Jim Simons’ other top picks).

When digging deeper into the Dell-HP saga we see that the former leads its fellow computer company in many areas. Dell’s dividend yield of 3% is only a 29% earnings payout, whereas HP’s 3.6% dividend  yield is rich given its negative earnings. Dell also operates with a long-term debt-to-equity ratio that is nearly half (52%) that of HP (97%).

We believe that Dell’s discounted 6x forward P/E is warranted given the near term uncertainty, but with an expected earnings growth rate that is around 6% – PEG of 1.0 – the PC maker still offers investors growth at a reasonable price. We see Dell as the ‘best house in a bad neighborhood,’ and expect it to hold up better than HP in the interim. Billionaire Carl Icahn has been rumored to be building a position in HP (see our thoughts).

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

6 Ways to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See

The Most Heartwarming and Inspirational Story Of This Halloween Season, It Will Make You Cry and Jump For Joy

10 Best Party Songs of All Time to Bring the House Down With

5 New World Order Conspiracy Theories that Will Strangle the World

The 10 Highest Rated Movies of 2014

The 10 Largest Container Shipping Companies in the World

The 10 Largest Armies in the World: Who Should We Be Afraid Of?

Best Warren Buffett Quotes on Money You Need to Hear

The 10 Highest Suicide Rates by Profession

The 20 Most Underrated Movies of All Time

The 10 Fastest Growing Companies in America

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!