Seagate Technology, $STX, comes into the week continuing higher after rounding out of a pullback over the course of 2023. It has now moved up from a bottom in November 2022 to retrace 61.8% of the drop. The RSI is in the bullish zone with the MACD positive and crossing up. There is resistance at 91.50 and 94.25 then 100 and 106.50 before 109 and 112 then 116.50. Support lower comes at 86.75 and 85 then 81.50 and 80. Short interest is moderate at 5.2%. The stock pays a dividend with an annual yield of 3.13% and will begin trading ex-dividend March 20th.
The company is expected to report earnings next on April 18th. The February options chain shows open interest focused at the 85 strike on the put side and at the 89 and 94 strikes on the call side. The March chain has biggest open interest at the 90 strike for both puts and calls. The April chain has open interest spread from 90 to 75 on the put side, biggest at 90. On the call side it is biggest at 87.50. The at-the-money straddle suggests a $9.85 move by expiry, the day after that earnings report.
Seagate Technology, Ticker: $STX
Trade Idea 1: Buy the stock on a move over 89.50 with a stop at 85.
Trade Idea 2: Buy the stock on a move over 89.50 and add a March 87.50/82.50 Put Spread ($1.45) while selling the April 100 Calls ($1.27).
Trade Idea 3: Buy the March/April 95 Call Calendar ($1.52) while selling the March 82.50 Puts (83 cents).
Trade Idea 4: Buy the April 80/90/100 Call Spread Risk Reversal ($2.00).
If you like what you see sign up for more ideas and deeper analysis using this Get Premium link.
After reviewing over 1,000 charts, I have found some good setups for the week. These were selected and should be viewed in the context of the broad Market Macro picture reviewed Friday which heading into February options expiration, saw equity markets continued to show strength, especially on the large cap and tech indexes.
Elsewhere look for Gold to continue in consolidation while Crude Oil consolidates in a broad range. The US Dollar Index continues to drift to the upside in consolidation while US Treasuries pullback in their downtrend. The Shanghai Stock Exchange will be closed all week for the Lunar New Year holiday while Emerging Markets consolidate under resistance.
The Volatility Index looks to remain very low making the path easier for equity markets to the upside. Their charts also look strong, especially on the longer timeframe where the SPY and QQQ are up 14 of the last 15 weeks and 5 in a row. On the shorter timeframe the QQQ and SPY closed a record highs and look strong. The IWM is trying to break higher on the short term basis and make a run at the top of the 22 month channel. Use this information as you prepare for the coming week and trad’em well.
2 Companies to Watch that Report Earnings Tomorrow
Micron Technology (MU): Micron is coming off a mixed FQ3 which delivered in line earnings but fell short on the top line. Year over year comparisons were unfavorable on both counts thanks to weakness in its PC business. Earnings dropped over 100% for a second consecutive quarter while revenue fell 25%. Micron’s primary DRAM market appears to be rebounding with indications of a broader bounceback in PC demand. Additional initiatives to expand NAND and NOR flash memory solutions are being widely used in the latest mobile computing devices and should provide a boost to the top line. Micron still faces some near term headwinds. Pricing pressure in SSD and heavy competition from key players like Western Digital and Seagate Technology could squeeze results. Shares have soared over 60% in the past 6 months but it still would be wise to expect volatility coming out of this report.
Darden Restaurants (DRI): Darden’s recent recovery may have hit its first roadblock. The restaurant group capped off its fiscal 2016 on quite a sour note. Earnings were reported right in line with expectations but were significantly lower than prior quarters. Revenue, on the other hand, delivered negative growth and missed analyst’s targets by about $30 million. Early indications look as though Darden is back on track and prepared to deliver a strong FQ1 report. Initiatives to incorporate technology to improve kitchen efficiency combined with new menu items should help drive top line growth. Meanwhile, new store openings will help boost sales volume but also pressure margin growth.
How do you think these names will report? Be included in the Estimize consensus by contributing your estimates here!
Above the Crowd – Positioning for Today’s Hedge Fund Holdings Release
It's time to take a peek under the hood of hedge fund managers' portfolios. Once a quarter, hedge funds disclose their quarter-end long positions through 13-F filings, and today is the deadline. These filings offer a timely, telling perspective on the decisions managers have made and clues on where the smart money might be headed.
But it's not enough to look through the 13-F filings on their own. Just reading the holdings and hoping to follow a few favorite managers into their top positions is a recipe for disaster. Instead, sophisticated investors cut the data and couple it with their own research. One popular way to look at the data is through hedge fund crowding. Crowding analysis looks at the concentration of hedge fund ownership throughout the equity universe.
But rather than just looking at which positions have the highest hedge fund ownership, why not look at the positions that aren't yet considered crowded but have seen the largest increases in hedge fund ownership? That's where the smart money is headed, right?
The Symmetric.io security screener provides a quick glimpse into exactly this. It shows the most crowded trades, but it also digs into which trades are just starting to get crowded, while controlling for market cap and other factors, as well. The screen-grab below filters for positions that have at least $5b in institutional ownership and have less than 15% of hedge fund ownership, so these are reasonably large, liquid positions that are not quite crowded enough to raise any flags. The final results are sorted by the arithmetic increase in hedge fund concentration.
The top five positions that have increased the most in terms of crowding are Seagate Technology (STX), Marathon Oil Corp (MRO), Michaels Companies (MIK), L-3 Communications Holdings (LLL), and Symantec Corp. (SYMC). These are the positions that, as of the end of Q2, had increased the most in terms of hedge fund crowding, had a minimum of $5b in institutional ownership, and were still below the radar -- as in, they weren't flagged as crowded trades.
How did these positions do? Well, we charted them to see how they performed as of the filing date. It's the date at which they disclosed the position to the SEC, so the holdings would have been available to anyone willing to do the analysis. From that time to today, the S&P 500 (SPY) is up 6.78%. Four out of the five positions that met our criteria are up more than the S&P 500. On a equal-weighted basis, the basket of five positions is up 21.16%.
Naturally, these returns have been calculated ex post, and there's no way of know of know how this strategy will perform in the coming quarter. It could reverse entirely, after all. Nonetheless, the data comes out today, and the full Symmetric Hedge Fund Rankings, reports, and analytical framework will be available for analysis tomorrow at Symmetric.io. What will the next five names be?
As always, the information contained herein does not constitute an offer to sell or a solicitation of an offer to purchase any securities and is not intended to provide investment advice. Before investing in any investment product you should consult with your financial, tax and/or legal advisors.
Seagate Technology PLC (STX) Information Technology - Computers & Peripherals | Reports April 29, Before Market Opens
Key Takeaways
The Estimize community is calling for EPS of $0.54 on $2.66 billion in revenue, 14 cents higher than Wall Street on the bottom line and $60 million on top
Weakness in the PC industry has put pressure on hard disk and solid state drive sales
Seagate’s propensity to cut costs while still offering a generous dividend yield should appease investors until it turns itself around.
What are you expecting for STX? Get your estimate in here!
The recent volatility in the PC industry has proven to be quite detrimental for Seagate Technologies. Seagate, along with Western Digital, is the industry leader in hard drive and data storage solutions for personal computers. As the market views hard drives as a distant memory, the stock has slipped 53.1% in the past 12 months. Unfortunately, earnings have tracked this trend and despite a slight beat last quarter, earnings have plunged from its highs of $1.34 at the start of fiscal 2015. Since its last report Seagate is seeing unfavorable revisions activity with per share estimates cut 24% in the past 3 months. Consequently, the Estimize community is calling for EPS of $0.54 on $2.66 billion in revenue, 14 cents higher than Wall Street on the bottom line and $60 million on top. Compared to a year earlier, profits are predicted to decline 46% while sales could fall as much as 20%. On average, the stock does well leading up and through earnings seasons. Shares maintain a 3% gain 30 days ahead of earnings through 30 days following earnings with small ups and down in between.
As PC sales continue to wane, Seagate has witnessed meager growth in its core hard disk and solid state drives. Physical data storage solutions are slowly being phased out in favor cloud storage. As a result, Seagate and its peers have had to discount its traditional storage units, placing pressure on earnings and margins. Thankfully, cloud storage requires data centers with massive hard drives to store its information. This should partially offset the losses Seagate is seeing in its other retail storage units. However, given Seagate’s propensity to cut costs and provide substantial dividend yields, it won’t be long before investors benefit from this stock.
Do you think STX can beat estimates? There is still time to get your estimate in here!
In my previous post, I highlighted the stocks from David Fish’s CCC list (Dividend Champions, Contenders and Challengers) that passed all 10 out of 10 quantitative criteria designed to filter out stocks that are trading at a discount to their historical price in spite of strong financial positions. 9 stocks emerged.
Now with ~$9K in cash to invest, we’re looking at a maximum of 6 stock purchases, so I could have stopped there. But another 13 stocks were close, passing 9 out of 10 of the criteria (in a few cases 8). 9 out of 10 isn’t too bad, and a number of them only barely missed the target metric. So I feel like they deserve mentioning.
Now Presenting: The “High” Yield Quantitative Watch List – Honorable Mentions
It’s worth noting that a lot of these missed in the same criteria categories…either not having a net positive cash position (or $1B), or not quite meeting the cash flow CAGR metric. Only one had a dividend cushion ratio less than 1.0. So here we go, listed again roughly according to yield and consecutive dividend increases:
Stock #1 Seagate Technology Public Limited Company (STX) – Current Share Price $34.41
Seagate missed the top-tier cut because of its current debt to market cap of 42%. Considering the stock is down almost 50% for the year, this is a relatively recent issue. Mr. Market’s sour opinion has obliterated ~$10B of market capitalization. The company just cracked the CCC list having raised dividends for only 5 consecutive years. Any time a stock yields over 7%, caution is warranted. But their cash flow situation is incredibly strong…for now. The future of hard disk drives is bleak, so Seagate will need to adapt if it’s going to stick around the CCC for the long haul, but the current cash situation is pretty positive.
Eaton just barely missed out because of its total cash position. Their total cash of $568M is slightly less than their debt of $867M…and it’s not $1B. Considering TTM cash from operations was $2.5B, and dividends + investments only amounted to $1.5B, they certainly could have $1B in cash if they wanted to (they’ve been buying back stock and paying down debt instead). This Irish industrial goods company’s profile describes them as a “power management company”. They make, sell and service high-end industrial equipment. They’ve raised dividends for 6 consecutive years to an average tune of 11.2% DGR. Sounds promising to me.
Stock #3 QUALCOMM Incorporated (QCOM) – Current Share Price: $49.62
QCOM only had a 5 year Operating Cash CAGR of 2.94% against a target of 5% or better. It’s worth noting the 10 year CAGR is 6.9%. They just wrapped up their fiscal year at the end of September and 2015 financials were almost universally down compared to 2014, which has been reflected in a share price drop that’s only slightly less drastic than Seagate’s. QUALCOMM is facing market share issues as the mobile device chip market has gotten very competitive. In spite of those headwinds, 13 years of consecutive dividend increases and a healthy balance sheet are compelling reasons to keep an eye on this company.
Stock #4 Nucor Corporation (NUE) – Current Share Price $41.32
It almost isn’t fair that Nucor missed the first list. The only issue with their metrics was that the debt to market cap is 33.62% against a target of 33%. With the current global commodities environment, a steel manufacturer is likely facing tough times. But the company has raised dividends 42 consecutive years, so this isn’t their first rodeo. They’ve increased the dividend an average of 20% per year over the last 15 years. The current reverse DDM DGR based on the share price is 6.4%. That is a big divergence.
Stock #5 Cohen & Steers Inc. (CNS) – Current Share Price $30.69
CNS’ 5 year cash from operations CAGR was a meager .37%. The company’s operating cash flow is very irregular. Since 2005, operating cash flow has been the following (in millions): 50, 5, 117, 35, 22, 54, 72, 20, 76, 55, 104 (TTM). That’s a weird pattern. They’re a relatively small investment management company, but they have zero debt, which is probably a good thing for a company with unpredictable cash flow.
Stock #6 Lazard Ltd. (LAZ) – Current Share Price $44.89
Lazard’s $900M in cash was just shy of the $1B mark, and less than their $1.2B in debt. Other than that everything looks very strong. Although there is something inherently shady about a financial advisory and asset management firm based in Bermuda…the $1.40 dividend isn’t subject to any kind of foreign withholding taxes, and it’s been raised for 8 consecutive years.
Stock #7 Miller Industries Inc. (MLR) – Current Share Price $22.24
Miller also had a very weird pattern to their operating cash flow over the last 10 years. The actual 5 year CAGR was technically negative, although not if you look at 2011 to TTM. This Tennessee based company makes and sells tow trucks and vehicle carrier trailers all over the world. Well how about that. They also have zero debt and have raised dividends 6 consecutive years.
The 5 year cash flow CAGR of only 0.63% was Eaton’s issue for this analysis. If we shift the frame of reference to 2011 to TTM instead of 2010 to 2014 they have a 5 year CAGR of over 10%. 2014 was kind of a down year for this mutual fund company. (Full disclosure: long 45 shares with a cost basis of $33.40/share)
Stock #9 Fastenal Company (FAST) – Current Share Price: $39.71
Fastenal’s $111M in cash is less than its $315M in debt. But that debt is less than 3% of market capitalization, and the industrial supply company’s dividend cushion is quite strong. (Full disclosure: long 40 shares with a cost basis of $37.02/share)
Stock #10 HollyFrontier Corporation (HFC) – Current Share Price: $50.26
This dividend challenger only has $626M in cash against $983M in debt. If it weren’t for that, HFC would be right next to Valero (VLO) on the prime watch list as a no brainer in the petroleum refining space.
Stock #11 Applied Industrial Technologies, Inc. (AIT) – Current Share Price: $41.38
Another case of less than ideal total cash position, although this one is a little more extreme than the others. AIT’s $64M in cash is quite a bit less than its $355M in debt. This wholesale industrial equipment distributor has raised dividends an average of 11.6% per year for 6 consecutive years. The leverage is something worth watching, but they generate plenty of cash to cover the $1.08 dividend.
Stock #12 Crane Co. (CR) – Current Share Price: $51.50
Okay technically Crane Co. missed on two metrics. The EPS 5 year CAGR was only 4.94% instead of 5%, and they only have $335M in cash against $847M in debt. But come on… 4.94% is basically 5%. And if we use 2010 to TTM numbers the EPS 6 year CAGR is 7.3%. Something weird happened to the adjusted earnings in 2011 because it was anomalously low. 2011 to TTM technically represents a 150% 5 year CAGR. The point is the company is growing just fine. The $1.32 dividend represents only a 2.56% market yield, but with 10 consecutive years of increases and average 8.2% DGR, it just might be worth locking that in now so the invested yield can climb.
Stock #13 United Technologies Corporation (UTX) – Current Share Price: $98.22
This one technically missed on two metrics as well, posting only 4.84% for its Operating Cash 5 year CAGR. Also the dividend cushion ratio is only .89 (assuming an 8% DGR). It’s not a horrible ratio though, considering the company has $22.7B in total debt. No one is forcing them to pay off all that debt in the next 5 years, so it’s not unreasonable to assume this aerospace stalwart’s dividend will continue to grow as it has for the last 22 consecutive years.
Western Digital is extremely undervalued on a free cash flow and earnings basis, providing an attractive opportunity for value investors.
WDC has strong price momentum, EPS growth, and return on equity numbers.
SSDs will complement, rather than replace HDDs. Gartner is predicting continued (albeit weak) growth in HDDs for the next four years.
We are using the recent pullback in price to build a position in the stock. Expect continued outperformance from WDC in 2015.
A) Introduction
Western Digital Corporation (NASDAQ:WDC) is the dominant HDD manufacturer in the United States with over 45% of the entire market. While HDDs are neither as fast nor durable as SSDs, they are more than seven times cheaper. So while it's true that SSDs are taking market share, HDDs are not going anywhere anytime soon. In fact, HDD sales are expected to continue to grow for the next four years (more on that later).
In this article, we'll outline why Western Digital offers the perfect combination of value, price momentum, profit growth, and efficiency. The report will start with a breakdown of Western Digital's valuation profile, then will proceed to an analysis of the price and profit growth, followed by an analysis of recent "smart money" transactions, and concluding with some qualitative analysis and conclusions. We take a quantitative approach to investing, preferring to focus our analysis on metrics that have strong predictive ability. Thus, we tend to analyze academic papers and perform historical back tests on different metrics before including them in our analysis. We will provide links to the academic papers we draw inspiration from as we progress through our breakdown of the stock so investors can see for themselves what we base our conclusions on.
B) Valuation Breakdown
We'll start by analyzing Western Digital's value profile. This is important to look at as Nobel laureate Eugene Fame has found that "Value stocks have higher average returns than growth stocks." Western Digital's valuation profile is shown below:
Source
There are a few interesting things to note from the table above. First, Western Digital is a cash flow machine. The company's free cash flow yield - which we can derive by inverting price/free cash flow - is 8.25%. This is higher than its earnings yield (6.07%) meaning the company generates more free cash flow than actual earnings. Free cash flow is a much more indicative and practical measure of how a company is performing, as it is much harder to manipulate. The fact that WDC is trading at a Price/FCF of 12 when the overall market is trading at an average of 86 shows that stock is severely undervalued on a relative basis. This is a good sign as study after study shows that stocks trading on lower price multiples tend to outperform the market. WDC looks fairly attractive on a book value basis as well, with its price/book (2.75) being lower than the industry group (3.50), sector (5.08), and overall market (6.89) averages. Overall, we rate Western Digital as "Undervalued" and expect the stock to outperform the market by 3.67% over the next twelve months.
C) Growth Breakdown
There are a variety of different growth metrics that have been shown to predict stock returns. Most important among them is price momentum. Winning stocks keep winning, and losing stocks tend to keep losing. Western Digital's growth profile is shown below:
Source
WDC has managed to overcome weakness from the computer & peripherals group over the last six months (-4.43%), gaining 6.57% versus 4.48% for the technology sector and 0.34% for the overall market. WDC was even stronger over the last twelve months, gaining 21.5% versus 3.5% for the Technology sector and 2.5% for the overall market. WDC leads the industry in profit growth (annual EPS growth of 68%), which is much higher than the industry group (-41%), technology sector (3.7%), and overall market (17.3%) averages. This is also a much better growth rate compared to its main HDD rival - Seagate Technology (NASDAQ:STX) - that had annual EPS growth of -6%. The company is also relatively efficient, returning 18% on equity and 10% on assets. Once again, these stats are much better than the industry group, sector, and overall market averages. Overall, Western Digital is a "Moderate Growth" company and we expect the stock to generate 2.94% of alpha attributable to growth, over the next twelve months.
D) "Smart Money" Breakdown
In addition to value and momentum, we will also analyze how the "smart money" on the street is playing Western Digital. We consider the "Smart money" to be short sellers, company insiders, and institutions. Each of these stakeholders tends to be much more sophisticated than the average investor and thus their transactions give good clues of what is to come. We have found loads of academic research showing that short sellers, company insiders, and institutions all predict stock returns. This "smart money" breakdown for WDC is shown below:
Looking at the table above, it seems that company insiders have been dumping the stock over the last six months (-29% in ownership). While this is disheartening at a first glance, a further look into the individual company insider transactions reveals two things. First, the majority of the insider selling comes on the same day that those same insiders execute options. This is natural and mimics the pattern seen in other companies as insiders will execute options and sell them for instant cash. Secondly, this pattern of insider selling has been consistent for the last 10 months. While this could be a worrying sign that company insiders have been dumping the stock for the last year, you could also interpret this as evidence that the recent company insider selling isn't anything to be worried about. If company insiders were selling Western Digital when the stock was below $86, and it's now at $106 after hitting a high at $114, then their transactions haven't been very indicative of future performance.
We should note that the academic study cited above showed that company insider buying was much more predictive than company insider selling, as insiders will often sell based on non-market related motivations (liquidity, personal reasons, etc.). Additionally, company insider transactions were less indicative for large cap stocks, which WDC most certainly is ($25 billion market cap). Thus, while we are cautious about the company insider selling, we feel the extremely low short interest (1.5% of float versus 6.5% for the market) is more indicative of the future performance of the stock. The stock has also seen moderate accumulation from institutions recently (+1% in last three months).
E) Qualitative Analysis & Conclusions
We'll now supplement our quantitative analysis with a qualitative discussion of some of the major growth catalysts and risk factors that could impact the stock price in the near future. As we mentioned at the start of the article, the faster and more durable SSDs are expected to capture significant market share within the space. With that being said, the overall market pie is growing as HDD shipments are expected to grow 2.9% a year from 2013 to 2018, as indicated by Gartner research. Gartner has also believes that SSDs will"complement, not replace" HDDs as the future capacity of firms is expected to be enormous. Given that Western Digital owns 45% of the entire HDD market, they are in a prime position to capture this growth. Nevertheless, there still remains a possibility that SDDs progress faster than people expect and become cost competitive with HDDs sooner rather than later. We are firm believers in the former case rather than the latter, but nevertheless it remains a possibility.
Overall, we feel that WDC is attractively valued with strong price momentum, EPS growth, and profit efficiency. The company releases earnings Tuesday after hours, with analysts expecting $2.10 EPS (according to Zacks). Western Digital has beaten consensus estimates eleven times in a row, and thus an earnings beat on Tuesday looks highly likely. Wall Street seems to agree with our bullishness, with the average price target on the stock set at $118.32 (+12% from current price), as shown below:
We are using the recent pullback in stock price from $114 as our entry point, and expect the stock to continue its outperformance in 2015.
