SGI: A Tech Stock Weathering The Broad Market Storm

| About: Silicon Graphics (SGI)

Summary

SGI is a very depressed stock, and like I said in my previous article, no matter what the earnings picture looked like, the stock would probably rally (and it did).

SGI surprised the market once again with an EPS outlook that took everyone by storm, and is one of the few stocks that has not corrected during the current selloff.

However even after reaching $7 a share, I think there is plenty of room for upside. And if I am right, it could even double over the next 12 months.

In my last article on Silicon Graphics (NASDAQ:SGI), (please consider: Silicon Graphics: The Odds Are In Our Favor), I said no matter what earnings looked like, the odds were in our favor and the stock would rally no matter what. And the reason was simple; this was a very depressed valued stock, and even the worst possible outcome was baked in the cake (the stock price).

Now I am not sure what the market was smoking, but the very next day earnings were announced (October 28, 2015), and the stock tanked to the tune of 10% (the company beat EPS by $0.01 and revenue by $3 million).

I was already positioned before earnings, because I did not want to miss out on the rally (because I was sure of it). So when SGI opened for trading on the next day and the stock fell 10%, I was shocked!

We all know what the reason for a 10% correction is after an announcement, right? There is always some corner we have not covered, and for some odd reason, that is the corner the market takes into consideration and sells a stock (%#$@^).

However in this case I could not find a reason why everyone was selling the stock. I looked at the announcement again and again, I looked at the balance sheet again and again, and I could not find anything wrong with the quarter's numbers. On top of that, forward guidance was great. What was this market smoking I said to myself?

Anyway, not being able to find any reason for the 10% slide, I bought some more SGI. And then I bought some more, and then some. Before I know it, SGI was my largest position.

To make a long story short, over the next several days the stock rallied and has never looked back.

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History repeats itself

A short while ago SGI reported preliminary FQ2 2016 results and the stock exploded once again (up 25%).

For the upcoming quarter (the company is reporting FQ2 results on Wednesday, January 27) revenue is now expected $150M-$152M and EPS of $0.12-$0.14.

The company's older forecast called for FQ2 revenue of $140M and only guided for non-GAAP earnings to be positive, while the market was modeling $140.1M in revenue and $0.03 EPS.

So after correcting some from the the previous rally, the stock reached a little above $7 a share, and is probably the only stock I am following that has not corrected in the recent sell-off.

However SGI still has plenty of upside

The question now is, has SGI run its course and should investors sell? The answer is no.

If you have the stomach for this crazy volatility, my advice is to hold onto this stock as a core long-term position. Let me explain.

Basically, this is still a very depressed stock. Even after the rally, the company's market-cap is only $247 million.

While there are not that many analysts covering SGI, the average price target is $9.75. So that still leaves room for plenty of upside if they are right.

The consensus calls for 2016 revenue to come in at $611 million, but revenue for 2017 is being modeled at $683 million. That's pretty good revenue growth for any stock, let alone a stock trading at such depressed levels. (and is the reason it has not corrected in my opinion).

But what really caught my eye - and why I think SGI is so depressed - is the price/sales ratio.

Currently, and even after the rally, SGI trades for 0.4X its 2016 revenue and 0.36X its 2017 revenue. Ok ok, don't shoot me please, I know that using the price/sales ratio is not the best ratio to pick, but I think it is in this case.

Also please take a look at my previous article for a more detailed look at the company (link above). Because as I said back then, the stock is trading at a very deep discount to where it has been trading historically, and it has a fairly healthy balance sheet.

So my target for SGI is about $15 over the next 12 months. Yes it might be a little juicy, but if SGI can repeat its current EPS guidance over the next 3-4 quarters, I see no reason why this company should not trade at close to 1X revenue. Especially in light of the fact that its forecasted growth is pretty good.

How to play SGI

Currently (2 days ago), I decided to sell my position and put the money to good work in other stocks that had taken a beating. So I picked up some of my favorite day trading speculative stocks like DDD and GRPN.

The object is to make some money on the bounce, and hopefully SGI will correct some. My hope is for a 10% correction, but I am willing to buy at higher prices if I do not see the stock correcting by much (and so for it is not correcting).

So my advice to you is (should you decide to take it), is to wait a little to see if the stock corrects. If not, you will have to chase it if you also believe that it has the potential to reach $15 a share over the next 12 months. Happy hunting to all …

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.