Buffet's HP Stake

Warren Buffet became the largest shareholder in HP, but analysts aren't all that convinced it's a good buy.

Best day of the year

Last week, Berkshire Hathaway quietly disclosed in a filing that it had acquired 121M shares, or over an 11% stake in the PC manufacturer. The stock bumped up 15%, meaning that Buffet's stake increased by $650M in value. But the move faded in the days after, coming off the best result in years. The market still pays attention to the Oracle of Omaha. The question is, what does Buffet see in the company that other analysts don't?

After Buffet's announcement, UBS downgraded the firm to neutral, though still targeting a price that's 10% above the current market. The investment bank argued that PC sales were expected to be weaker, and the company would be slowing down its buybacks, due to less available capital following margin compression in the middle of the semiconductor crisis. What did Buffet say? Well, nothing; he isn't legally required to explain publicly why he buys certain shares.

It could be a timing issue

Traders generally focus on short-term moves in stocks, and analyst actions typically reflect that. UBS's price target, for example, is for this year. Buffet notoriously invests for the long haul. On the other hand, Buffet's picks in the tech sector have been mixed. Apple is doing great. IBM and Oracle? Not so much.

Although HP doesn't have the flashy appeal of Apple, for example, it does fall into the category of a value stock. Its forward PE is just 8.8, half that of the S&P 500. Although the dividend yield is just 2.6%, well below inflation, part of that is due to the recent extensive buyback program. And, yes, computer companies are under pressure because of the chip problem. But that is expected to be resolved sometime in 2023 as new factories come online.

Maybe Buffet is right about HP, but it might be a couple of years before investors see a result.

HP

The HP share prices trade above the 200, 100, and 50 moving averages. Before the announcement prices were trading below both 100 and 50. Now, $37 is near-term support, whereas the 200-day at $33 is a major level.

Traders can observe the gap down at $35, which is interim support that could get filled. But if it is lost, the risk of sliding to $30 would increase too.
Contrary, should the $38 intraday support holds, $40 becomes the near-term top. Above there, the round $50 level is major resistance.

Source: Trading View

Key takeaways

Buffett’s HP stake increased the stock price by 15% initially but quickly reversed after UBS downgraded the company to neutral due to the semiconductor crisis. Despite that, the investment bank expects HP’s stock price to end the year 10% above its current price due to improved dividend yields.

While traders focus on short-term moves in stocks, Buffer invests in value stocks for the long term. So, he might be betting his money on the chip crisis being resolved some time next year. But since the firm is expected to slow down its buyback program, perhaps HP will be the next IBM or Oracle in Berkshire Hathaway’s portfolio.