Three months ago, the battered shares of Hewlett-Packard Co. hardly seemed like a obvious choice for The Globe and Mail's My One and Only stock-picking contest. Today, the computer giant is leading the pack after a blockbuster first-quarter gain.
The share price of the U.S. high tech company – the pick of analyst Brian Pinchuk of Montreal-based Lorne Steinberg Wealth Management Inc. – surged 72 per cent in Canadian-dollar terms during the first three months of the year. That handily beat the 3.3-per-cent increase by the S&P/TSX Total Return index during the same period.
Given that the stock was trading close to 18-year lows in December, Mr. Pinchuk says he was not particularly surprised by its strong rebound. "That often happens when you shop at the discount store," he said. "We tend to look for great companies that have stumbled. … Often you can find some treasures."
The eight investment professionals participating in the annual stock contest were asked to choose a North American-listed security that they expected to outperform this year. To discourage bets on penny stocks, any Canadian pick had to have a minimum market capitalization of $100-million, while U.S. names were required to have a market value of more than $1-billion (U.S.). Returns are calculated in Canadian dollars, including dividends.
The prize? Eternal bragging rights and a Globe and Mail coffee mug.
In the case of Hewlett-Packard, Mr. Pinchuk saw a stock that many investors had given up on after a series of management mishaps. Declining personal computer sales and tough competition from Apple and Samsung in the growing world of mobile devices had further depressed sentiment.
"But Hewlett-Packard is somewhat of a misunderstood story," he said. "It's a lot more than [a] PC company." Thirty per cent of its revenue comes from its information technology services division, while its printing and ink-cartridge business remains a solid contributor. With the introduction of Windows 8 for touch-based devices, Hewlett-Packard should begin to gain traction in the tablet market, he added.
Mr. Pinchuk, who holds a degree in computer engineering, figured he couldn't go wrong with Hewlett-Packard after estimating that its services business alone was worth about $14 a share – the stock's price in December – while the company's break-up value exceeded $35 a share. The stock closed at $23.84 a share at the end of the quarter, and finished Thursday at $22.30 a share.
Even at its current price, the stock is compelling at under seven times forward earnings, Mr. Pinchuk said. But because of the price run-up, he is considering taking some profits. (Hewlett-Packard was bought for one of his firm's funds in December.)
He cautioned that it is still "a fragile story although the bleeding has stopped." Its latest chief executive officer, Meg Whitman, "has been fairly transparent about the problems and is working to solve them." On Thursday, however, Ray Lane announced he was stepping down as the company's chairman, which may herald yet another shake-up of the company's board.
"We would love to see a soft quarter," Mr. Pinchuk said. "We believe in the long-term story, but we are value investors and would love to pick it up at a cheaper price."
ProMetic Life Sciences Inc., a small bio-pharmaceutical stock chosen by Robert McWhirter of Selective Asset Management Ltd., was the second best-performer with a robust 47-per-cent return. The company, which has developed technologies to remove contaminants from blood and recover valuable proteins from plasma, has seen resurgent interest in its shares after China's Shenzhen Hepalink Pharmaceutical Co. took a 10-per-cent equity stake in the company last fall.
In contrast, U.S. iron ore producer Cliffs Natural Resources Inc. emerged as the worst performer in the contest with a stunning 49-per-cent loss. "Everything that could go wrong, did go wrong," said David Sherlock, a portfolio manager at Calgary-based McLean & Partners Wealth Management Ltd., who won last year's contest with a bet on U.S. oil refiner HollyFrontier Corp.
While Cliffs was purchased for a small pool of money in early December at his firm, he mitigated losses partly from having placed a brokerage order to automatically sell the stock when it dropped to $29 a share (the price at which it was purchased). The stock closed the quarter at $19.01 a share.
"For the contest it is not going to work, but as far the real money goes, it did not do any material damage," he said.
Mr. Sherlock had expected the firm to benefit from an improving Chinese economy. In February, however, Cliffs slashed its quarterly dividend by 76 per cent to 15 cents a share amid slumping iron-ore prices and cost overruns.
"The Chinese economy is still sluggish, and that is not going to bode well for the price of iron ore," he said.
On the other hand, "all the bad news is priced in. As a deep value stock, it might be reasonably priced to look at it again."
% gain or (loss) Q1 2013
Brian Pinchuk, analyst, Lorne Steinberg Wealth Management Inc.
ProMetic Life Sciences Inc.
Robert McWhirter, president, Selective Asset Management Inc.
Neptune Tech. & Bioressources
Alex Ruus, portfolio manager, BluMont Capital Corp.
Flextronics Int’l Ltd.
Benj Gallander, president, Contra the Heard investment newsletter
Gail Bebee, author, No Hype: The Straight Goods on Investing Your Money
Alexion Pharmaceuticals Inc.
Stephen Rogers, portfolio manager, Horizons Investment Management Inc.
Nelson Cheung, portfolio manager, Formula Growth Ltd.
Cliffs Natural Resources Inc.
David Sherlock, portfolio manager, McLean & Partners Wealth Management Ltd.