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Tuesday, July 19, 2005

Tech Bullish - Leaders Breaking Away (AAPL) and Losers Bouncing (HPQ)

Loved the Apple earnings announcement last week -- the Street was POSITIVE that the iPod was ready to slow down; estimates for iPod shipments stood a little over 5MM. They KNEW iPods were slowing, it was just a matter of by how much. I was talking with a medium sized ($800MM) hedge buddy of mine and he asked me, "When does Apple break down?" I told him I didn't think that it would because of the strength of the iPod and the lift it would provide on the business. What is the Street missing? Apple's proprietary retail strategy. By having it's own retail locations, Apple now has a distribution arm that won't abandon it the second Sony (SNE) announces yet another ill-fated initiative. Developing the retail arm was (another) genius move by whomever at Apple figured it out. I loaded up the day of the earnings call because I believed that the Street is dying to find the short side of Apple's story.
Keep looking boys.
Now, on to losing trades. HPQ is making a great run based on the restructuring moves of Hurd and the announcement of a new line of printers.
They've gotten a very optimistic lift from the announcement that HPQ will eliminate 10% of the company's workforce. Having experience in restructurings and companies in distress, I know that this is actually a very tortured, long road to recovery. I suspect that remaining HPQ salaries are still bloated across the board, which will create a very real management problem. Namely, the superstars within the organization realize that compensation will come down across the board, regardless of actual performance. They will naturally begin to entertain offers from companies with better growth profiles (Salesforce.com et al.) because this provides a chance to lock-in the high levels of compensation they currently have and swap-out their equity (options) with a better stock. Naturally, fast-growing organizations will be happy to have such experienced people and will be able to afford the steep ask.
The counter to this is the fact that HPQ is well-positioned to sell into the tech rebound in effect. They've got enough fundamental technologies that they will get a lift from strong IT spending. Additionally, the Street loves turn-around stories. Remember the early days of Chainsaw Al Dunlap? Same story, different company. There are buyers on the hope that this will change HPQ's position as there is no proof yet that the initiatives will or won't work. So, the rebound on the stock does not surprise me and is why I haven't instituted a short yet.
But I'm watching this one like a hawk...

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