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Why Hewlett-Packard Shares Are On The Verge Of A Breakout

Why Hewlett-Packard Shares Are On The Verge Of A Breakout
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Hewlett-Packard Company (NYSE: HPQ) shares have looked much like the broader market in terms of directional movements since the market's low in October. As other major large-cap U.S. indices have done, Hewlett-Packard on Wednesday just hit a new 52-week high.

Does the company's management have in their bag of tricks to help keep the stock above this significant technical resistance? Let's take a look at both sides of the Hewlett-Packard story.

What The Bulls See

  • A 1.7-percent annual dividend and only a 22 percent payout ratio, indicating there is plenty of room to grow that dividend.
  • More than $9.5 billion in positive levered free cash flow annually.
  • Cheap valuation metrics: an enterprise value of $75.59 billion versus a market capitalization of $71 billion, a price-to-book ratio of 2.45, a price-to-sales ratio of 0.62 and a PE ratio of just over 9.
  • Clean balance sheet metrics: a debt-to-equity ratio of 68.62 percent and a current ratio of 1.16.

Related Link: Hewlett-Packard Reports Q4 In-line With Estimates

What The Bears See

  • Flat revenue growth estimates for 2015.
  • Modest 6.1 percent EPS growth estimated for 2015.

The Technical Take

Technicians note that Hewlett-Packard shares simply have to overcome the 52-week high to open the door for a run to the $40s. At time of writing, the $38.25 level represented both the 2014 and multi-year high, as well as significant long-term horizontal line resistance (see the attached weekly chart). Unfortunately for the bulls, even such a significant breakout may be limited in upside potential.

The upper edge of the 2013 current uptrend channel comes in at right around $40. A certain percentage of investors, traders and computers will be taking profits or betting against Hewlett-Packard once that resistance line is tested.

Stock chart: 
Stock chart

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