Sandisk: Bargain Price Stock Poised To Rally

Sep.13.11 | About: Western Digital (WDC)

Sandisk (SNDK) is a bargain price stock that is poised to rally from here. Earlier in the year, the stock traded as high as 53.60 on 1/10/11. It has drifted lower and lower to a low 32.24 on 8/22/11. In the past few weeks, it has regained some momentum to the upside rallying to close at 40.02 today.

Fundamentally, this stock is dirt cheap. The PEG is at 0.62 compared with 1.74 for the industry. The P/E is 8.71 compared with 22.60 for the industry. Better pricing for NAND memory moving forward bodes well for the company. There's also a seasonality factor at play here as many of its products go into electronics we buy for the holidays.

Technically, recent price action is encouraging. It convincingly broke through 39.11 suggesting that there's more to upside to go.

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Upgrading the stock to buy from neutral with a price target of 46 in 12 months.

There's a couple of ways to play this.

  1. Go long on the stock
  2. If I were really concerned about the stock market falling apart because of the European debt crisis, I would put on a call spread and thus limit my risk to only the cost of the trade. I would buy the JAN 40 Call and sell a JAN 46 for a net debit of 2.38.
  3. If I don't think the market would just falter, I would sell a JAN 34 Put in addition to the call spread in #2. This would net me a credit of 0.72 ( that's 3.1 - 2.38). Note: if the stock were to drop below 34 by January expiration, I would be put the stock at 34, 15% below today's level.

Disclosure: I am long SNDK.