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

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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).


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).

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