Chasing Value™: HP and Hurd, NCAA and USC -- Misguided and Foolish

The following are suggestions for more appropriate consequences for Mark Hurd's inappropriate behavior and USC's breaking the rules.

None of us is likely to learn the exact circumstances that led to Hurd's dismissal but the general information is enough to know that the board actions were extreme. The investing public sent a clear message by dumping the stock in response. What we do know is that Hurd was sued for sexual harassment that did not involve sex (another story altogether) and that he submitted expense statements that were falsified to a degree that his rationalizing does not excuse.

Here is what I would have demanded instead. For his lack of discretion with a female consultant, I would have made him donate a generous amount of his salary to women's shelters throughout the region. For his accounting misdeeds, I would have made him repay a multiple of the amount in question and cut his expense account by a similar amount for the duration of his contract. Having sufficiently admonished him in a way that is fitting the crime, I would have started negotiating an extension of his next contract. That would have served the shareholders and the company, preserving value, while upholding the dignity of the company and board.

The University of Southern California (USC) and its top-ranked football program has been penalized, like many before it, for rules infractions regarding Reggie Bush and an apparent $300,000 dollar loan that occurred under the noses of the administration, athletic department and coaching staff. However, Reggie Bush, now playing professional football for millions of dollars, basically got embarrassed while the coaches went on to greener pastures, like Pete Carrol, now coaching the Seattle Seahawks. The athletic director, Mike Garrett, was forced to resign and that had to hurt, but the real pain has been inflicted on the current and future students that did nothing wrong.

USC will have a championship blotted out, banishment from bowl games for two seasons, and loss of scholarships. I will leave out the discussion of who did what and who should have done what to focus on the NCAA response. The NCAA has a history of being the last to know, late to the game, self-serving (not serving students first) hypocritical, nonresponsive and sometimes overzealous too. Now most of the guilty parties have moved on while the innocent pay for the infraction. Imagine being in a bank when it is robbed and the criminals getting away with the loot. They are never brought to justice but instead you force the customers, some of whom may have witnessed the crime, to have their salaries docked until all the money was paid back -- hey, someone has to pay.

A more appropriate consequence from my point of view would have been to make USC pay for additional football scholarships at the other Division-I schools. Excluding USC, a huge television and bowl game draw, out of Bowl games will reduce overall income for the NCAA and also hurt the innocent. Instead they should have let them play and made them forfeit the millions in income they would have received and distribute that money to other programs as well. These penalties would be costly to the university, not the innocent students and players. It would have been equally embarrassing and it would have actually helped competing students and programs.

It will be silly if USC wins the Pacific 10 and the second place school gets the diminished prize. How long will the shareholders of Hewlett-Packard have to wait for their shares to regain the lost value, and what if the company falters further under new leadership? Nothing is guaranteed.

HP stock has dropped in the last three weeks from $47.56 on August 2, to $39.85 at Friday's close, (hitting a 52-week low of $39.33 during the day), a loss of 16.21%. At this level one might consider investing. The P/E is around 11, and the P/CF is low at 6.60 (average is 10) as is the P/S of 1.1. It returns a 19.49 ROE. There seems to be value here. Unfortunately with the CEO position up for grabs, a transition period for management and upcoming products and the board proving to be mediocre, investors are likely to watch from the sidelines.

The play for me is to sell to open the February puts at a strike price of $38 and receive $2.90 per share today. This gives me a 16.5% return while giving the company six months to sort things out. If I do not close out the position before that time, and the stock is put to me. My cost per share at that time will be $35.10, and that might be the right price.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture and planning firm. He writes the columns Chasing Value™ and Serious Money. Disclosure: He does not own shares or options in ORCL or HPQ.