Klarman to Whitworth Stung in Hewlett-Packard Value Hunt

Klarman to Whitworth Hurt as Hewlett-Packard Value Eludes Buyers
Hewlett-Packard Co. has repeatedly disappointed investors as it struggles to cope with a shift in buyer preference toward smart phones and tablets and away from the personal computers and printers that are its specialty. Photographer: Mike Fuentes/Bloomberg

Hewlett-Packard Co.’s value is proving elusive for prominent value investors stung by the technology stock’s deepening slump.

Baupost Group LLC’s Seth Klarman, Ralph Whitworth of Relational Investors LLC, Jeremy Grantham of Grantham Mayo Van Otterloo & Co. and Donald Yacktman of Yacktman Asset Management Co. were among those who boosted their holdings in 2011, only to watch their investments slide this year as the company lost its ranking as the No. 1 computer maker.

Hewlett-Packard fell as much as 15 percent today after the company took an $8.8 billion writedown, citing a “willful effort to mislead investors and potential buyers” at Autonomy Corp., the British software maker it bought last year for $10.3 billion. Shares are down about 55 percent in 2012, making Palo Alto, California-based Hewlett-Packard the third-worst performer in the Standard & Poor’s 500 Index, according to data compiled by Bloomberg.

“Value investing in technology is far different from value investing in other parts of the economy,” Christopher Ely, managing director at Boston-based Nichols Asset Management, which oversees $275 million, said in a telephone interview today. “Something that looks cheap may not really be cheap because the business may be decaying as technology changes.”

Hewlett-Packard, which lost 12 percent to close at $11.71 in New York, has repeatedly disappointed investors as it struggles to cope with a shift in buyer preference toward smart phones and tablets and away from the personal computers and printers that are its specialty. It’s the S&P 500’s worst performer in 2012 after education company Apollo Group Inc. and Advanced Micro Devices Inc.

Missing Estimates

The company posted an $8.9 billion quarterly loss in August, underscoring the challenge facing Chief Executive Officer Meg Whitman. In October, Whitman forecast 2013 profit that missed estimates and said a turnaround won’t happen any time soon. The stock sank to a 10-year low today after the company’s writedown and another profit warning.

Jim Chanos, a hedge-fund manager who is well-known for betting against stocks, told CNBC today that he was shorting Autonomy in early 2011, and his skepticism about the software company led him to bet against Hewlett-Packard as well.

Chanos, speaking at an investor conference in July, said Autonomy’s accounting was “dreadful,” and that Hewlett-Packard “did almost no due diligence” before acquiring the company. Chanos oversees $6 billion at Kynikos Associates Ltd.

P-E Ratio

Klarman, 55, who founded his Boston-based hedge fund in 1983, is a bargain hunter who wrote the preface to the sixth edition of “Security Analysis,” the 1934 book by Benjamin Graham and David Dodd that is considered by many the bible of value investing.

He bought 20.8 million Hewlett-Packard shares in the third quarter of 2011 when the stock sold for an average of $29.48 a share, according to data compiled by Bloomberg. He added to the holding in this year’s second quarter before dumping almost half his stake in the third quarter, when shares sold for an average of $18.40.

Hewlett-Packard sold for five times earnings as of Sept. 30, 2011, according to data compiled by Bloomberg. The S&P 500 Index sold for 12 times earnings on that date.

Elaine Mann, a Baupost spokeswoman, didn’t immediately respond to a message seeking comment. The firm held 14.4 million shares as of Sept. 30, Bloomberg’s data show.

Relational Investors

Relational Investors, the San Diego, California-based firm founded by Whitworth and David Batchelder in 1996, bought 17.5 million Hewlett-Packard shares in last year’s third quarter, Bloomberg data show, a stake that has grown to 34.5 million shares. Whitworth, 57, has used his shareholdings to agitate for change at companies including industrial conglomerate ITT Corp. and defense contractor L-3 Communications Holdings Inc.

Whitworth was appointed to Hewlett-Packard’s board in November 2011 to help shore up investor confidence shaken by strategy shifts and reduced sales forecasts. Hewlett-Packard was his third-largest holding as of Sept. 30, according to a regulatory filing.

Relational representatives didn’t immediately respond to a call seeking comment.

Grantham, chief investment strategist at his Boston-based investment firm, is best known for his bearish outlook and for spotting bubbles early. He correctly forecast in 2000 that U.S. stocks would decline in the coming decade, and as early as July 2007 predicted that a large global bank would go bust amid credit market declines.

Grantham’s Stake

GMO added 17.3 million Hewlett-Packard shares in the fourth quarter of 2011, Bloomberg data show, and increased its holdings steadily this year, making the firm the seventh-largest owner of the stock. Tucker Hewes, a spokesman for GMO at Hewes Communications Inc., said the investment manager doesn’t speak about individual holdings.

Yacktman is sticking with the holding even after its disappointing performance, he said in a telephone interview.

“It is a cheap stock and it is a stock for patient investors,” Yacktman said. “Let’s give Meg Whitman a little time to straighten it out.”

His $7.1 billion Focused Fund beat 99 percent of rivals over the past five years, Bloomberg data show. Yacktman, 71, looks for bargains by comparing stock prices to future cash flows, largely ignoring macroeconomic issues.

Dodge & Cox

Yacktman added to his stake in Hewlett-Packard throughout 2011 and held 11 million shares as of Sept. 30, Bloomberg data show. Affiliated Managers Group Inc., based in Beverly, Massachusetts, acquired a majority stake in his firm in April.

Dodge & Cox, the San Francisco-based asset manager, was Hewlett-Packard’s largest shareholder as of Sept. 30 with a 7.2 percent stake, Bloomberg data show. Four of Dodge & Cox’s funds -- Stock Fund, International Stock Fund, Balanced Fund and Global Stock Fund -- held stakes in the company, according to regulatory filings.

Hewlett-Packard was the biggest detractor in the $41 billion Dodge & Cox Stock Fund this year through yesterday, according to data compiled by Bloomberg. Without the Hewlett-Packard investment, the team-managed fund would have gained 2.1 percentage points more this year, for a return of almost 19 percent, the data show.

Dodge & Cox declined to comment, Jennifer Mackley, a project manager for the firm, said in a telephone interview.

Thomas Perkins, manager of the $12.2 billion Perkins Mid-Cap Value Fund, sold his fund’s shares in Hewlett-Packard at a loss several years ago. Investors may have overlooked the company’s challenges because the stock looked inexpensive and they wanted to believe in the turnaround story.

“Hewlett-Packard’s earnings were being supported by underinvesting for the future,” Perkins wrote in an e-mail. “It was an unsustainable strategy.”


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