I track metrics of both value and sentiment, and I usually only buy a stock if measures of both value and sentiment are aligned. I've noticed, though, that there's more money to be made if you can pick a stock with good value and poor sentiment that's about to improve. HPE may be a candidate for just such a positive change in sentiment.
I've struggled with how to calculate PEG ratios post-Covid. I generally take my growth rate from an approximately five-year line (three years past actuals, two years future estimates). But when you've got a black swan event right in the middle of your time series, what do you do with that? Do you use a continuous function that makes the growth rate look negative? Or do you use a piecewise function that makes it look positive? I've settled on taking the average of the two. So, keep that in mind when I tell you that I've calculated HPE's PEG ratio at 3.39 and PSG ratio at 0.36. I typically multiply the two values together to get a composite PEG*PSG ratio, in this case 1.23. Of the stocks I track, the only one with a better PEG*PSG than this is $HPQ.
HPE is also trading near the bottom of its 3-year valuation range in terms of forward P/E and forward P/S. It has generally traded at about .75 forward P/S. Right now it's about .47. Implicitly, there's about 59% upside from here. Do the same calculation with forward P/E, and the numbers imply about 40% upside from here.
Another thing I really like about HPE is how innovative it is. Over the last three years, HPE has averaged 50 patents granted per billion dollars of current market cap, making it more innovative for its size than any other company I watch save IBM . Throw in the fact that HPE is expected to pay 4.8% in dividends over the next 12 months, and you've got a stock that combines both shareholder returns and growth potential. That's rare.
HPE's Equity Starmine Summary Score improved from 1.6/10 to 3.7/10 in the last 24 hours, meaning that analysts are growing more positive on the stock. The upgrade caused a nice spike in the stock price today.
The sentiment change comes after HPE reported 3Q results and not only beat analyst expectations on and revenue, but also beat analyst expectations on 4Q guidance. Analysts sharply increased estimates for the next couple years after the report. Perhaps even more importantly, HPE dramatically improved its financial health from the year-ago quarter. From the conference call: "Our Q3 free cash flow of $924 million was up $276 million year over year, driven by a record cash flow from operations as a result of our improved execution this quarter. . . . We generated cash flow from operations of approximately $1.5 billion. This is the highest level for the past 11 quarters, as we improved our operational execution." The company does expect cash flow to be sequentially lower next quarter due to restructuring, but the company is still in stellar shape financially, with an $8.5 billion cash reserve.
Given HPE's strong results, I expect continued analyst upgrades. And I'm not alone in thinking so; HPE now has a of 0.51.
HPE's technicals are neutral at the moment, with the stock in a triangle. A couple ways to play it would be to buy near the bottom of the triangle or wait for an upside breakout. I do think there's a good chance HPE will make an upside breakout in the coming weeks, overall market conditions permitting.