Value Daze: Hewlett-Packard Meltdown Hammers Value Funds

Here's a headline you don't see every day: Tumbling tech titan trashes value funds.

The Hewlett-Packard File

Operations

Business: Computer and imaging equipment and services

Stock Snapshot

52-Week Range: $32.63-$78

Percentage Change from Jan. 1: -11.5%

Market Cap: $77.4 billion

P/E Ratio: 24.1

Source: Baseline and Morningstar.

On Monday computer giant Hewlett-Packard(HWP) posted fiscal fourth-quarter earnings of 41 cents a share, missing Wall Street analysts' estimates by a whopping 10 cents. The disappointment comes on the heels of similar misses from other PC shops like Apple Computer (APPL) and Dell (DELL) and a Sept. 22 H-P prediction that it would meet analysts' targets.

Hewlett-Packard shares, already down 11.5% this year prior to Monday, were off $5.69, or 14.5%, at $33.44 in Monday midday trading. When a big tech stock blows up, growth funds -- currently carrying a fat 40% tech stake on average -- are usually the biggest casualties. But not this time.

Today some 160 large-cap value funds own H-P shares -- about 50% of the category. By comparison, only 30% of big-cap growth funds, 111 funds, and just 18% of tech-sector funds, 20 funds, are exposed to the company's sagging shares.

De-Valued It may come as a surprise, but the fund category getting hit the hardest by H-P's warning is the value camp, not growth or tech
Funds	% Owning H-P Shares
Large-Cap Value funds	48%
Large-Cap Growth funds	30
Technology funds	18
Source: Morningstar. Holdings as of most recent portfolio reports.

To say the least this probably comes as a surprise to many value-fund shareholders, who probably picked a value fund to insulate themselves somewhat from precisely this type of tech-stock implosion.

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In the classic definition, value funds are essentially bargain hunters -- typically focusing on cheap stocks of steadily growing companies, which tends to keep tech stocks out their portfolios. The average large-cap value fund has just 14.4% of its money in tech stocks -- less than half the mercurial and pricey sector's weighting in the S&P 500 , according to Morningstar.

But in recent years tech has led the market, motivating many value-fund managers to nibble at the sector's battered types. And H-P fits that bill with a 24.1 price-to-earnings ratio nearly in line with the broader market and a 19% five-year annualized return that slightly trails the S&P 500.

Big Up, Big Down H-P has outpaced the market on the upside and downside in recent years

For their part, growth-fund managers -- who seek out the fastest growing shops without fearing high valuations -- have been dumping shares of shops like H-P that depend on the maturing PC market for much of their growth. At the start of the year nearly a third of tech funds owned H-P shares, but by Sept. 30 that figure had fallen to 18%.

Of the 10 funds with the highest percentage of their assets sunk into H-P's shares, only one ((MISEX)Midas Special Equities) is a growth fund. The list includes one of the biggest value funds out there, the $19 billion (NYVTX)Davis New York Venture fund, which had a 5.1% H-P position on June 30 -- the date of the most recent data available on the firm's Web site.

Funds With the Biggest Stake in Hewlett-Packard
Fund	Percentage of Assets in H-P	YTD Return
(SDOWX)Strong Dow 30 Value	7.9%	-6%
Fidelity Exchange	7.2	-2.6
(OFTDX)Orbitex Focus 30 D	6.8	-16.8
(CNGRX)Fidelity Congress Street	6.7	2.1
(STFGX)State Farm Growth	5.9	-4.7
(FLCIX)FTI Large Cap Growth & Income	5.8	-0.7
(DGIAX)Davis Growth & Income A	5.5	-1.4
Kenilworth	5.3	NA
(NYVTX)Davis NY Venture A	5	5.7
(MISEX)Midas Special Equities	4.7	-15.6
Source: Morningstar. Performance through Nov. 13.

The value fund's co-manager, Chris Davis, appears to like H-P quite a bit. It also holds a significant position, 5.5%, in the $83 million (DGIAX)Davis Growth & Income fund, and on Sept. 30 it had a 3.2% position in the $5.2 billion (SLASX)Selected American fund -- a large-cap value fund Davis also co-manages.

While some might chide value managers for buying H-P, it's an understandable decision. Similarly this year, many have started nibbling at battered tech types like the floundering Lucent Technologies(LU), down more than 68% this year.

While value managers have found that cheap tech stocks like these have gotten, well, cheaper, their price-conscious streak has kept them ahead of growth peers this year. The average big-cap value fund is up 2.6% since Jan. 1, while the average tech-stuffed large-cap growth fund is down just over 8%, according to Morningstar.

If you're shopping for a tech-light value fund, the Big Screen sifted the fund world for those very funds just a couple of weeks ago.

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