SanDisk: Goldman Sachs Makes a Big Mistake, And Profits

Includes: GS, WDC
by: Shlomi Cohen

Goldman Sachs (NYSE:GS) has a strong reputation for being a well-oiled money machine in the derivative and short trading industries. It makes a lot of money as a broker and as an advisor to large hedge funds, which invest huge sums in these niches.

As someone who owns shares of SanDisk Corporation (Nasdaq:SNDK) in my portfolio tracked at "Globes", I have followed Goldman Sachs's surveys of SanDisk for many quarters. SanDisk is considered a favorite of derivative and short players, since it is a volatile - high beta - share.

Since October of 2009, Goldman Sachs has been quite pessimistic about SanDisk, which has been reflected in "Neutral" recommendations and a target price which has nearly always been set lower than the then-current market price. In actuality, during this whole period the company's returns were much better than Goldman Sachs's forecasts, and have led them to consistently raise their target price.

Despite the consistent misses in their coverage of the company, they proved again on Friday, a day after SanDisk issued its results, that there is no one better in recommendations in the derivatives and short selling spheres. (See earnings call transcript here.)

The quick rise of SanDisk's share price from $35 in the fall of 2010 to almost $54 this month convinced Goldman Sachs's options experts to advise their clients-- in the middle of the month-- to buy SanDisk February "Put" options, with a strike price of $48, when the market price on that day was around $52. Those options would generate profits if the share price fell below $48, so that the options experts were assuming that SanDisk's share price would collapse with the publication of its results, and the holders of the "Put" options would profit.

They relied on the analysis of their colleagues who cover SanDisk, and they, as usual, believed that the advance estimates in the market on the results and guidance were too optimistic.

What actually happened was that the forecasts were actually too low, and on Thursday, after the close of trading, the company beat revenue forecasts by a bit, beat EPS estimates by more than 25%, and in addition, provided revenue guidance figures for first quarter and full year of 2011 which were above analyst estimates.

With the backing of results and guidance which were better than expected, SanDisk shares opened trading on Friday with slight gains. But after a few minutes, the trend reversed, because a lot of money-- which in my opinion came mostly from short-selling focused hedge funds-- did not give the share a chance.

Later, when the news from Egypt started coming in, the big drop off 9% was completed on huge turnover of $1.25 billion -- 10% of the company's market cap. This is not the money of widows and orphans, but mostly that of hedge funds which sell and buy huge quantities of shares on the same day, picking up enormous gains from the volatility in the share.

Goldman Sachs's people were able to place a check mark for the day by the end of trading, because the "Put" option investors who took their advice made a lot of money, despite the fact that their analysts again erred, big time.

I believe that 2011 will be no less good than 2010 for SanDisk investors, when the share price soared 69%, as many of its new growth engines are only heating up. An example is two markets that Apple (NASDAQ:AAPL) pioneered last year: the tablet computer market and replacing the data storage drives in laptops with flash drives (SSD).

On the other hand, for Goldman Sachs's analysts, 2011 will be-- in my opinion-- no less embarrassing than 2010, which they began with a low EPS estimate of $2.05 per share, and needed to more than double by the end of the year to $4.21 (GAAP).

SanDisk's strong situation in early 2011 could be seen, even before the results and conversation of Thursday, from the short words by its new CEO Sanjay Mehrotra in a video clip on the company's website.

In the clip, Mehrotra repeats the word "strong" six times in a barely a minute description of the company's status heading into 2011, in terms of technological leadership, advanced production capabilities, existing products, and those in development.

Getting back to Goldman Sachs's absurd forecasts, what most shocked me on Friday was that their EPS forecast for SanDisk for 2013, which they set for the first time on Friday, collapses without any explanation to $1.75 per share - compared with over $4 per share this year - in a period when the SSD market is set to be a giant one and to bloom along with other markets like smartphones.

Disclosure: Author holds shares as part of his portfolio tracked by "Globes".

Published by Globes [online], Israel business news - - on February 1, 2011 Reprinted on Seeking Alpha with permission © Copyright of Globes Publisher Itonut (1983) Ltd. 2011