PALO ALTO, Calif. (CNN/Money) -
Investing often is about looking for anomalies, the things that stick out. Find something that jumps out at you and you might have an investment idea.
A short phrase in a long report jumped out at me from my e-mail box Thursday. Previewing Hewlett-Packard's (HPQ: up $0.33 to $16.95, Research, Estimates) upcoming first-quarter earnings (scheduled to be released Feb. 25), Merrill's Steve Milunovich wrote: "ESG losses may have narrowed to less than $100 million."
ESG means Enterprise Systems Group, and it's HP talk for a money-losing unit that makes servers and storage devices, the kind of heavy-iron computer products purchased by big companies, also known as enterprises.
The unit has been a stinker because it merged a hodgepodge of some market-leading and other market-lagging products from HP and the former Compaq Computer. Fixing the Enterprise group has meant wringing costs out of it, and turning a profit there is one of the linchpins of HP CEO Carly Fiorina's overall strategy to right the company.
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According to the analyst, the enterprise situation is improving. To be more precise, he is estimating that the unit's operating losses will be $81 million, or two cents per share.
The thing that struck me about Milunovich's prediction is that he's stating a loss in a positive light. Losing just two cents a share on this business is a reason Milunovich thinks HP is an inexpensive stock at Wednesday's closing price of $16.62.
Is that just routine optimism from a sell-side analyst? I don't think so. Looking at his breakdown of expected quarterly operating earnings and losses explains why.
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Milunovich forecasts that just two HP businesses, printing and consulting, make money, 32 cents per share in total. Because the other units – PCs, enterprise business and financing – only contribute a five-cent operating loss, the Merrill analyst sees HP earning 27 cents per share this quarter from operations, 29 cents on the bottom line.
He reckons that makes HP a $24 stock, more than 40 percent higher than it is today and a level HP has not consistently traded at in nearly two years. If he's right, that's a huge upside opportunity.
To HP bulls, those two profitable units are robust enough that the others can lose small amounts of money without concern. Now, just imagine what would happen if HP actually made money on all its units.
Timing that tech-stock turnaround . . .
Milunovich, in a separate report, also put together a bunch of research from others to answer what he calls the "$64,000 question": When will tech spending improve? His short answer: Not yet. (Note to Steve: This question's worth a whole lot more than 64 grand. But for those of you too young to know where this expression comes from, here's an explanation.)
His more specific answer is to expect a general tech-market recovery in the 2004-2005 timeframe. That's why the best a tech investor ought to expect these days is making good value investments. Like the beaten down shares of HP.
And finally, geek love
Palm is advertising a "Valentine Special" whose romantic appeal clearly is limited to a certain type: Buy a Palm Zire, the company's new $99 low-end handheld computer, and get a "free" red carrying case for it. That carrying case normally would set you back $14.95. The deal expires just before noon on Valentine's Day, Friday.
(Note to geeks out there who think that a scarlet handheld case will get your sweetie's transistors burning: Stick with flowers or candy. Even in Silicon Valley.)
Adam Lashinsky is a senior writer for Fortune magazine. Send e-mail to Adam at firstname.lastname@example.org.
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