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Portfolio Update

Taking Profits

By Elliott H. Gue, on Feb. 27, 2017

When we added Hewlett-Packard to the Wealth Builders Portfolio in early 2015, our investment thesis hinged on the expectation that the pending split of the company into Hewlett Packard Enterprise (NYSE: HPE) and HP (NYSE: HPQ) would enable these discrete entities to unlock value for shareholders by focusing on their core strengths.

We sit on a roughly 40 percent return in Hewlett Packard Enterprise, the spin-off that focuses on servers as well as cloud- and security-related technologies. CEO Meg Whitman deserves plaudits for monetizing the noncore enterprise service segment and legacy software business spinning off and merging these businesses with other companies sizable cash payments and an equity interest in the combined entities.

These transactions provided welcome capital to invest in business segments that offer more promise. Hewlett-Packard’s high-end servers also appear to be taking market share from rivals, though hardware commodification represents a long-term challenge to revenue and profitability. Sell Hewlett Packard Enterprise for a 40 percent profit.

Our position in HP, which houses Hewlett Packard’s legacy printing and consumer business lines, has gained about 5 percent since January 2015. The pending acquisition of Samsung Electronics’ (Seoul: 005930) legacy printing business will consolidate a shrinking industry and adds revenue, while HP continues to execute plans to roll out its 3D-printing business.

Despite HP’s solid performance, revenue will remain under pressure from secular headwinds in demand for printing and personal computers. Sell HP.

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