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Stocks in this article: HNZ DE HPQ TAP BG UNH MCK

Hewlett-Packard

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Hewlett-Packard (HPQ) is knee-deep in the process of converting itself from a computer manufacturer to a diversified IT firm, a prescient move given the headwinds in the OEM business right now. Excessive competition has turned PCs into a highly commoditized business with thin margins and highly cyclical exposure. Now HP is building out its complementary operations, with a focus on high-end enterprise IT services.

As a result, the company should be able to take advantage of the upswing in IT infrastructure spending that companies are undertaking in 2011 -- but competition is still powerful in this new direction. Of all the major PC makers, HP has long been one of the best-diversified, with a large share of the printer market. The printer business provides significant recurring revenue from high-margin consumables such as ink, and it's likely one of the reasons that HP's been one of the firms most eager to embrace enterprise IT.

Even though the company's second-quarter earnings last month were a complete debacle (a leaked internal memo forced the firm to release its results earlier than planned), with weak guidance taking most of Wall Street's attention, the company remains on track to continue improving its longer-term fundamentals.

Management announced a 50% dividend increase recently, bringing its payouts to 12 cents per share.

Hewlett-Packard, one of the top holdings of both John Paulson and David Tepper, shows up on a recent list of Hedge Funds' Biggest Buys and Sells.

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