Profit-Takers Pounce on H-P

Double-digit growth and Hewlett-Packard(HPQ Quote) don't normally go together.

But the top line on H-P's latest income statement showed revenue up 11% year over year to $25.1 billion.

Take away favorable foreign-currency effects, and H-P's sales were up 7% -- still an impressive feat for a company with $91 billion in annual sales. A blockbuster holiday season with strong sales of notebook PCs and printers were the main ingredients of the growth.

Investors reacted by sending shares down 4%, or $1.71 to $41.42 in recent trading Wednesday. But with H-P's shares up 37% since mid-June, some degree of profit-taking was inevitable.

A couple of disconcerting trends within H-P's quarterly results appeared to accelerate the selloff, as investors took fright at rising inventory levels, declining gross margins and a negative cash flow.

"Together, these have sort of worked in concert to help support bearish arguments on the stock," says one investor who is long H-P.

If gross margins continue to get compressed over the next couple of quarters and inventories build, then H-P could be in a tough spot, acknowledges the investor, speaking anonymously because of his firm's policy. At this time, though, he believes it's premature to react to these initial signs.

H-P's internal inventory swelled to $8.4 billion in the first quarter. That's up 8% sequentially and 24%, or by $1.8 billion, year over year.