The markets have seen a consistent trend of paranoia this summer, especially since May. The past month's global macro environment is proving that there is essence to the adage "Sell in May and go away".
Investors globally have seen paranoid sell-offs of equities that have no bearing on Europe. For example, United Rentals (URI) is a North American/Canadian company that has been beating analyst estimates since 2010 and yet it has fallen more than 30% since its 52 week highs.
So where does the investor go in this chaos? Common sense would say: choose a dividend stock that has taken a beating recently, and yet has a strong growth story behind it.
Take a look at Seagate Technology Plc (STX).
Seagate is one of the world's largest manufacturers of hard disk drives. The company's major competitors include Western Digital (WDC), Fujitsu, Hitachi, Toshiba, Micron (MU), Samsung, and SanDisk (SNDK).
There has been a huge hype that the use of solid state drives, flash memory and NAND drives in mobile computing devices including the tablets will shadow the use of hard disk drives that are dedicates to PCs. Technology pundits are already considering that the tablet computers are poised to completely take over desktop sales.
There cannot be smoke without fire though - and there is some reasoning behind this frankly naive consideration. It is a fact that during the past year, tablet computers have somewhat cannibalized sales of laptops and even PCs. However, one needs to be realistic and understand that while these new technologies like NAND or flash drives will be the favored storage solution for niche devices dedicated to mobile computing, there is simply no other option that can replace the use of disk drives for desktops.
Hard disk drives will continue to remain the storage solution for enterprise and PC markets, at least for the next few years.
Here are the top 5 reasons why STX could be a great play for 2012-2013.
- Dividend yield: STX has a healthy dividend yield of more than 4%. Consider the 4% your insurance against volatility.
- STX is undervalued by more than 80%, with a fair value calculation of more than $42. Owning the stock in the mid-twenties now and holding it in spite of and through the rough summer seas and into 2013 could give a healthy return on the stock along with a 4% dividend.
- In spite of the weaker global economy and the sovereign debt problems in Europe, the growing interest in Big Data and Cloud Computing is causing a strong demand in data storage. Also, there is a digitization revolution going on to convert old media into digital content. This bodes well for data storage companies like Seagate that have good market share in enterprise server.
- The disastrous flooding in Thailand had caused a major supply chain disruption in the semiconductor and storage industry. The result is that the average selling prices of hard disk drives have already increased significantly, and are projected to continue increasing, possibly resulting in a 20% or more increase in the average selling prices of hard disk drives. This is one reason why Seagate is poised for wider gross margins in 2012. Analysts estimate EPS of more than $6.50 in 2012 and $7.50 in 2013, hugely up from 2011's EPS of $1.09.
- Seagate has used strategic acquisitions to strengthen its core business. In 2011, Seagate completed acquisition of Samsung Electronic's hard disk drive business. The company expects to benefit by gaining better operating efficiency due to this acquisition.
Biggest risks to the trade include:
- an unexpectedly swift growth in the acceptance of Solid State Drives, although this is less likely based on market undercurrents, at least in next couple of years, and
- a Lehmann type situation in Europe, resulting overall lesser global IT spending and PC sales.
Investors must consider these risks before making a play in STX, but considering its $41 target price, the risk/reward opportunity in STX is really good.