Printer Malfunction: HP Downgrade Scares Investors Away

With a volatile geopolitical landscape and inflation worries dominating price action, analyst ratings have taken a backseat in the market. Yet on Thursday, a Morgan Stanley downgrade is having a huge negative impact on shares of HP Inc HPQ, making it the PreMarket Prep Stock of the Day.

Post-Deal Price Action: On many occasions in the merger and acquisition world, it is traditional for the acquirer to decline in price after making an acquisition for a variety of reasons.

That was the case on Monday for HP Inc. when it announced the purchase of Plantronics Inc POLY for $40 per share, which was a 53% premium to its closing price on Friday, as reported on Benzinga Pro. 

While it did decline on Monday by just over $1, it recouped those losses on Tuesday. On Wednesday, the issue sprinted to a new all-time high off the open but weakened to end the session in the red. As a result of the yo-yo action, the issue was right back at its closing price from Monday — the day the deal was announced.

The Ax: Before the market open Thursday, Morgan Stanley downgraded HP from Equal-Weight to Underweight. The firm attributes the downgrade to macro uncertainty contributing to a cautious outlook for hardware. As a result, there will be a reduction in PC forecasts, which will have a negative impact on first-quarter earnings, according to the analyst note. 

The downgrade included a price target reduction from $34 to $31. In a related move, Barclays, which already had an Underweight rating on the issue, lowered its price target from $30 to $29.

PreMarket Prep's Take: When the issue was being covered on the show Thursday, it was trading down nearly $2 at the $37 area. Co-host Dennis Dick was astounded that the issue was off 5% from the downgrade. He commented:

“People just cannot think for themselves, and if Morgan Stanley says 'sell,' they sell,” he said. “If it gets down to $34, I may be interested in going long.

The author of this article noted the importance of holding its March 21 low ($36.72) off the open. If not, it was difficult to identify a valid support level until the previously mentioned $34 area.

HPQ Price Action: After a much lower open ($36.97 vs. $38.84), HP had a brief rally to $37.09 and resumed its move lower. Buyers stepped in way ahead of the aforementioned support level and bottom at $35.81, and the stock sharply reversed course.

The stock was down 6.1% at $36.47 late in the session. 

The discussion on HP Inc. from Thursday’s show can be found here: