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Why Hewlett-Packard Shares Are Soaring Today

Thursday - 5/23/2013, 4:15pm  ET

Following what seemed to be a relentless upward march in stock prices, we may be witnessing a shift in sentiment and the start of a period in which prices get reacquainted with downward volatility.

U.S. stocks fell 0.8% yesterday, and they opened lower this morning, with the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average down 0.84% and 0.62%, respectively, at 10:05 a.m. EDT. Still, that's nothing compared to Japan's Nikkei 225, which fell 7.3% today!

Hewlett-Packard beats the Street
What a difference a quarter makes. Dow component
Hewlett-Packard reported its quarterly results after yesterday's close, and investors seem to like what they see, sending the shares up 13% (in a market that is broadly declining, no less).

Nonetheless, that HP's results should impress investors reflects the scale of the PC industry's predicament. Sure, operating profit of $0.87 per share beat Wall Street's consensus estimate of $0.81, but at $0.55 per share, net income fell by nearly a third. CEO Meg Whitman also told the Financial Times that PC revenue declined by a fifth year over year.

The following graph shows HP's year-to-date total return relative to its closest peer, Dell, and the broad market (you can make out this morning's price spike at the very end of HP's graph):

HPQ Total Return Price Chart

HPQ Total Return Price data by YCharts.

A 56% return looks like a stellar result, and investors may be tempted to jump onto this locomotive. However, it's worth remembering that HP shares started the year at an atrociously depressed valuation: On Jan. 1, they closed at just 4.3 times the next 12 months' earnings-per-share estimate. At yesterday's close, the multiple stood at six; that increase accounts for roughly three-quarters of the share price return over the same period.

When a share's valuation has been crushed and there is massive uncertainty concerning the company's prospects, one can expect to witness substantial volatility in the price multiples subsequently. The latest results may be the start of a successful turnaround by Meg Whitman, but investors should be aware that betting on this remains a speculation, not an investment.

The massive wave of mobile computing has done much to unseat the major players in the PC market, including venerable technology names like Hewlett-Packard. However, HP is rapidly shifting its strategy under the leadership of Whitman. But does this make HP one of the least-appreciated turnaround stories on the market, or is this a minor detour on its road to irrelevance? The Motley Fool's technology analyst details exactly what investors need to know about HP in our new premium research report. Just click here now to get your copy today.

This article was originally published as Why Hewlett-Packard Shares Are Soaring Todayon

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