Was Ahmet Okumus’ Right About His Top Bets?

#3 HP Inc (NYSE:HPQ)

– Shares Owned by Okumus Fund Management (as of September 30): 4.48 million

– Value of Holding (as of September 30): $114.9 million

Okumus Fund Management initiated a large stake in HP Inc (NYSE:HPQ) during the third quarter, several weeks ahead of the completion of the company’s spin-off of its enterprise business. After the spin-off was completed on November 1, shares of both HP Inc (NYSE:HPQ) and Hewlett Packard Enterprise Co (NYSE:HPE) largely remained range-bound during the fourth quarter. HP Inc (NYSE:HPQ) has started 2016 on a dismal note, losing 24% year-to-date.

“The Fund also initiated a number of new positions during the quarter. One such position was Hewlett Packard (HPQ), which had traded down over 30% this year on concerns about PC demand, the negative impact of FX (the strong dollar hurting the value of overseas revenues), and the company’s reduced cash flow guidance. We felt that those concerns were more than priced into the stock at a valuation of 7 times normalized free cash flow. The PC business has certainly been weak in 2015, but it contributes less than 10% of total EBIT. Earnings are declining slightly year-over-year due to the impact of FX, but on an organic constant-currency basis, which we feel is more reflective of a company’s true growth rate, HPQ will grow in the mid-single digits in 2015. There have also been a number of one-time items from separation costs and restructuring that will depress free cash flow this year and next, but these are temporary. At $25 per share, the company is trading at a P/E of 7 times and a price to EBITDA of 4 times, one of the lowest valuations in the S&P 500, even though the company has stabilized revenues and earnings on a constant-currency basis,” Okumus said in his letter to investors for the third quarter.