An Insider Bought Shares of HP

Hewlett-Packard Company (NYSE:HPQ)’s COO, Bill Veghte, transferred 58,500 of his directly held shares of the company’s stock to an annuity trust which then purchased about 23,000 additional shares, according to a filing with the SEC. About 15,000 shares are still held directly, so in terms of total ownership the trust’s buy represented a large percentage increase in Veghte’s holdings. It’s a good idea to track insider trading activity because studies show that on average stocks bought by insiders outperform the market (see more about studies on insider trading) . We think that this is because the incentives for an insider to diversify their investments are so strong that an insider will only buy more shares when they are very confident in the company’s prospects. Hewlett-Packard’s stock price is down 49% year to date, and 68% from two years ago. It’s possible that Veghte believes that the company is (finally) poised for a turnaround, though we’d note that there was significant buying from other insiders as recently as this past June. Find more insider purchases at Hewlett-Packard.

Hewlett-Packard Company’s fiscal year ended in October 2012. The company recently reported its results, which showed revenue down 5% from the previous fiscal year. Operating costs were up, but this was entirely due to large charges related to goodwill impairments and restructuring. If we ignore goodwill impairments, restructuring, and acquisition related charges, operating income dropped 18%; in addition, the size of the charges likely reflects poorly on HP’s management or at least its past management and culture. Sales actually declined at a faster rate in the fourth fiscal quarter than for the year as a whole, also not a good sign.

If there’s a case to be made for HP, it’s that the market has exaggerated how poorly the company is performing. Wall Street analysts expect HP to earn $3.32 in the current fiscal year, which implies a P/E multiple of only 4. This gives the business plenty of room to underperform and still qualify as a value investment. The dividend yield is also close to 4%, though the stock probably isn’t safe enough to be considered on pure income terms.

The Baupost Group, which is managed by Seth Klarman, reported owning over 14 million shares of Hewlett-Packard Company in its 13F filing for the third quarter of 2012; however, this was a 46% decrease from three months earlier (check out Seth Klarman’s stock picks). Kerr Nielson and Steve Cohen were two billionaires whose funds sold out of HP completely during the third quarter of the year.