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Sears, H-P shares worth wait

John Dorfman
| Friday, April 13, 2012, 12:17 p.m.

Don't tell holders of Sears Holdings Corp. (SHLD) how quiet and boring the stock market was in mid-February. In two trading days, Sears stock jumped 31 percent.

On the other side of the coin, Hewlett-Packard Co. (HPQ) shareholders lost 11 percent of their investment in five days.

Here's my take on stocks that have been on the move in recent days.

Sears Holdings

At the end of January I wrote, "Since investors now expect everything to go wrong (at Sears Holdings), there is room for pleasant surprises when anything goes right."

Something went right on Feb. 23 and 24. The stock, which had been trading below $50 a share as recently as Valentine's Day, rose more than $16 in two days to about $68.

The beleaguered retail chain, which is controlled by hedge-fund manager Eddie Lampert, announced some bold moves to pull itself out of the doldrums and improve its weak finances. Sears, which owns the Sears and K-Mart chains, will sell 11 store sites and shed its Sears Outlet and Hometown stores, possibly raising more than $700 million.

It had announced in December a plan to close more than 100 Sears and K-Mart stores, which it estimated will save $170 million.

The moves followed a loss of $3.1 billion on sales of $41.6 billion in fiscal 2012, which ended in January. Sears' revenue has fallen five years in a row.

There is no way that Sears, or any business, can cost-cut its way to prosperity. Long-term growth will always require an alluring product or service.

But the steps Sears is taking could help raise money to improve the core stores. Even after the recent jump, the stock is cheap at 0.17 times revenue. If I were a Sears holder, I would stay onboard.

Hewlett-Packard Co.

Not many major corporations are run for a former candidate for California governor who contributed $100,000 to a political action committee that backs Mitt Romney for president. Hewlett-Packard is.

It's too early to tell how Meg Whitman will do as Hewlett-Packard's CEO. She got the post on Sept. 22.

So far the marketplace isn't voting for Whitman. Since the day she took office, Hewlett-Packard shares have underperformed the Standard & Poor's 500 Index, trailing by five percentage points.

The five-day, 11 percent drop in H-P shares was sparked in part by the company guiding analysts to lower profit estimates for the second fiscal quarter. More profoundly, it reflects the company's struggle to compete in the tablet and hand-held markets. But I think there is value in the shares.

Hewlett-Packard remains a powerhouse in printers, and a player in computers. It has a nice cash cow in printer cartridges -- though competition is seeping into that niche and eroding the once-sky-high profit margins. In fiscal 2011, the company earned an 18 percent return on stockholders' equity.

Therefore, I consider the stock a bargain at its recent valuations - about 8 times earnings and 1.4 times book value.

MetroPCS

Richardson, Texas, wireless telecom company MetroPCS Communications Inc. (PCS) bounced up 16 percent in two days on Feb. 23-24 as news leaked that Sprint Nextel Corp. had apparently been thinking about paying $8 billion for MetroPCS, whose market capitalization has been about $4 billion.

Apparently, Sprint has backed away from the bid. I expect MetroPCS shares to slide back down from $12 into the $8 to $10 range where it has dwelt in recent months.

Sprint may be ravenous for an acquisition, as it wants to catch up with larger rivals AT&T and Verizon. But at 14 times earnings and with debt 162 percent of equity, I don't think MetroPCS will be appetizing to a less-hungry potential acquirer.

Gilead Sciences Inc.

Smacked down 17 percent in a few days, Gilead Sciences Inc. (GILD) was punished for a disappointing result in a clinical trial of a new drug for hepatitis C, for which investors had high hopes. The biotech stock hit $56 on Feb. 6 but by Feb. 24 had fallen to $45.

Six of eight patients in a trial relapsed fairly soon after they stopped taking the experimental drug. It's too soon to tell whether the drug is seriously flawed, or whether a different treatment regime will render it more effective.

Gilead, which earned $2.8 billion last year on sales of $8.4 billion, isn't dependent on one drug. It has 14 drugs approved and is a leading maker of drugs to treat HIV-AIDS.

Gilead is a volatile stock. With the recent setback, it trades for about $49 a share. I'd be a buyer at $36.

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