Thursday, February 2, 2012

STX: A hard-driving earnings surprise.

Odds are good that you have a product made by Seagate Technology PLC (STX) spinning busily in your computer.

STX makes hard drives, and their business has improved so much that on Tuesday they beat the Street estimate of earnings by 22%. The price gapped up on Wednesday, and since then has ticked up bit more today to set a higher high.

The PC business took a dive during the recession -- replacing computers wasn't a high priority for companies struggling to survive. So it makes sense that as the economy recovers, STX's business will as well.

There is some pressure on companies to upgrade, simply to keep up with current needs. Anyone using a Windows XP machine (like me) is two generations behind, and it's starting to show with the appearance of applications that won't run on an operating system that old.

On the other hand, hard drives have turned almost entirely into commodities. No one really thinks about the hard-drive brand anymore. And with the growth of cloud computing, hard drives are starting to look a bit like buggy whips after Ford started selling his Model T, at least atop the lap, if not yet the desk.

STX had the most bullish of 19 stocks added on Wednesday to Zacks' top buy list. See my essay "10,000 Charts" for a description of my screening methods.

Today's high -- $26.31 (so far) -- brings STX above the 2008 period of congestion before the recession collapse of the price. The next resistance level is $28.91, set in late October 2007.

The stock's highest high is $31.35, set in October 2003. So the price is within reach of blue-sky territory.

STX has an attractive return on equity of 29% with a fairly high debt/equity ratio of 0.84. Institutional ownership is 81%, and the price is low -- 93 cents of stock will buy control of a dollar in sales.

The stock is extremely liquid, with average volume of 19.7 million shares, and has a full selection of options, five-figure open interest and very narrow bid/ask spreads.

The implied volatility is at historic lows -- 43%, compared to 58% in late January and 85% last October. Yet the volatility is high compared to the S&P 500, which is at 18%. So STX has plenty of room to go lower, and that inclines me toward a short position, under the rule, Sell high buy low.

Next earnings are three months away. STX pays a 3.9% dividend and goes ex-dividend on Feb. 13.

Decision for my account: I've opened March expiration bull put spreads on STX, selling the $24 strike and buying the $19 strike.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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