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Everybody hates HP

September 27, 2012: 1:01 PM ET

Why have investors abandoned HP? One reason: Too much focus on this little dinosaur called the personal computer.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.

When your stock is trading at just 4 times earnings estimates for the next year, you'd think that the share price couldn't get much lower -- but Hewlett-Packard (HPQ) is proving to be the ultimate value trap.

Even though HP appears to be ludicrously cheap, its shares continue plummeting. The stock is down 33.5% this year, making it by far the worst performer in the Dow Jones Industrial Average.

Adding insult to its numerous injuries, HP is on track to be one of the Dow's biggest losers for the third consecutive year. HP fell 40% last year, trailing only the losses of Alcoa (AA) and Bank of America (BAC). HP was the worst Dow 30 performer in 2010 as well, falling nearly 20%.

CEO Meg Whitman, who took over the top spot at HP last year after the brief and disastrous tenure of Leo Apotheker, will need to convince an increasingly skeptical Wall Street that the company can turn around its sagging fortunes.

HP has a critical analyst meeting next Wednesday. Unless the struggling imaging and computer giant announces that it has found a new revenue stream by running the printing presses for the Federal Reserve's QE3 program (huge upside!), investors are likely to be disappointed.

HP, like its top rival Dell (DELL), is stuck in a business whose best days are probably behind it. HP didn't embrace the mobile revolution and it is paying the price. You only need to look at the stock prices of Apple (AAPL) and Android developer Google (GOOG), both of which have recently hit all-time highs, to know that consumers and corporations are increasingly ditching desktops and notebooks for smaller smartphones and tablets.

In a recent interview on the Fox Business Network, Whitman said that HP needed to offer a smartphone. Trouble is, HP already tried that -- and it was a colossal failure. HP acquired mobile device maker Palm in 2010 for $1.2 billion. After heavily promoting a new Veer smartphone (remember those TV ads with boxing champion Manny Pacquiao?) HP essentially shut Palm down and pulled the plug on its phone and tablet business.

Why should investors have any faith that another attempt at the mobile market will be more successful? (Maybe HP can work on developing a better maps app for Apple's iOS6 instead.)

To me, it's pretty telling that Microsoft (MSFT) decided it needed to enter the market with its own tablet, the soon-to-be-released Surface, instead of relying on its usual hardware partners like HP and Dell to come up with the gadgets that would work best with Microsoft's upcoming Windows 8 operating system.

Related: Fortune's Most Powerful Women: Meg Whitman and more Queen Bees

Whitman clearly needs to do more to make HP like IBM (IBM) and bulk up on software and services as opposed to PCs, printers and other low-margin gadgets. To be fair, HP has been trying to emphasize services and software since the Carly Fiorina era. Under Fiorina, HP made an offer to buy the PwC consulting business from PricewaterhouseCoopers back in 2000. The deal collapsed after HP and PwC couldn't agree on a price. Big Blue wound up buying the unit in 2002. HP bought Electronic Data Systems in 2008 under CEO Mark Hurd, who also engineered several software purchases.

But that hasn't been enough to overcome the weakness in the hardware business. It's why I keep referring to HP as "IBM Lite" and "Little Blue." HP's sales and profits are expected to fall this fiscal year (which ends in October). Analysts are predicting that earnings per share will only increase by 3% in fiscal 2013, and that revenue will once again decline.

That's why HP might still be the most overvalued company ever to trade at just 4 times earnings estimates. Wall Street is currently forecasting average annual earnings growth of only 2.7% for the next few years, so HP's price-to-earnings-growth (or PEG) ratio is 1.5.

That's not good. PEG ratios are often used to justify higher earnings multiples for rapidly growing companies, i.e. tech stocks that are doing much better than HP. Using this measure, HP is more expensive than Apple (PEG of .55), Google (PEG of 1), as well as IBM and Microsoft (both with PEG s of 1.1). Heck, even Facebook (FB), which is trading at a frothy 33 times 2013 earnings estimates, is more attractive than HP when you factor in Facebook's growth rate. Facebook's PEG is 1.2.

Related: Hewlett-Packard to cut 2,000 more jobs

HP may eventually figure out what needs to be done to revitalize its once-proud brand. Whitman may be forced to revisit the idea of spinning off or selling the PC business, a decision originally made by Apotheker that she reversed. Or, if the company truly decides it needs to be a leader in hardware, it will have to find ways to cut costs and focus more on innovation. My colleague Kevin Kelleher at CNNMoney sister publication Fortune pointed out last week that HP has spent far less on research and development over the past few years than IBM.

But one thing is certain: HP's stock is not a bargain. Traders often point out that you should never try and catch a falling knife. HP looks more like a falling machete ... with a falling ink toner cartridge and desktop thrown in for good measure.

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Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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