Hewlett-Packard Company (HPQ): Pzena Still Believes in Turnarounds

Richard Pzena founded Pzena Investment Management in 1995 and now has more than $24 billion in assets under management. The firm’s strategy is to rank companies from the cheapest to the most expensive based on current earnings to normal long-term earnings power. Basically, Pzena likes to buy companies that are good businesses selling at low prices. Outlined below are Pzena’s top five stock holdings at the end of the first quarter; let’s check them out (check out Pzena’s portfolio).
Hewlett-Packard Company (NYSE:HPQ)
Tech turnaround
Pzena’s top stock pick was Hewlett-Packard Company (NYSE:HPQ) , making up 5.7% of Pzena Investment’s public-equity portfolio. HP saw an impressive rally last week thanks to a better-than-expected EPS results. HP posted April-ended quarterly results of $0.87 per share, versus analysts’ estimates of $0.81 per share. However, it’s likely that Hewlett-Packard Company (NYSE:HPQ) will continue to see weakness in the interim due to a deteriorating PC market.
Hewlett-Packard Company (NYSE:HPQ)’s restructuring plan is expected to start yielding results over the interim, and is  expected to save $3 billion to $3.5 billion thanks to layoffs in the range of 27,000 to 29,000 employees. HP plans to reinvest these savings into its cloud business.
Longer-term, Hewlett-Packard Company (NYSE:HPQ) expects the enterprise segments to drive future growth, not to mention other initiatives the company plans to focus on, including increasing sales coverage, emerging markets, digital printing and mobile. However, all this will take time. Analysts expect HP’s EPS to be flat over the next five years.

Dying brick-n-mortar

Staples, Inc. (NASDAQ:SPLS) is Pzena’s second-largest stock holding and makes up 3.6% of its portfolio. Staples, Inc. (NASDAQ:SPLS) continues to face competition from the likes of other brick-n-mortar retailers and online retail. Most notably, OfficeMax Incorporated (NYSE:OMX) and Office Depot Inc (NYSE:ODP) are planning to merge in an effort to better weather the decline in brick-n-mortar retail spending.
Not only is competition causing problems for Staples, but the company has also seen a decline in business thanks to poor consumer spending. Sales in 2012 were down 4.2% and comp sales down 5% year-over-year. What’s more is that although Staples, Inc. (NASDAQ:SPLS) appears cheap at 11.5 times earnings, analysts expect the company to only grow EPS at a mere 6.5% annually over the next five years, well below the 12.2% industry average.

Going into 2Q, there were a total of 37 hedge funds bullish the stock. Pzena has the most valuable position worth $523 million, and other notable hedge fund owners include billionaires Donald Yacktman and Ken Griffin’s Citadel Investment Group (see Griffin’s newest picks).

Off the radar
Pzena’s third- and fourth-largest stock holdings are lesser known stocks. TE Connectivity Ltd. (NYSE:TEL) is Pzena’s third-largest stock holding and makes up 3.2% of its portfolio. TE designs and manufactures over 500,000 products for connecting data insider a number of products.
TE saw its sales down some 6% in fiscal 2012 thanks to the economic weakness in Europe, but sales are expected to only be down another 0.5% in fiscal 2013. The longer-term driver should be an increase in auto demand. TE also appears to be rather cheap, with a 15.8 times earnings, compared to Molex’s 20.3 times and Amphenol’s 21.9 times.