Seagate Technology's (STX) stock over the past 12 months has been on a tear, appreciating in value by almost 200%, compared to the S&P 500 gain of 14.40%. Unlike companies like Facebook (FB), Netflix (NFLX), and Groupon (GRPN) that increase in value at triple digit multiples in a year perpetuated mainly on hype and lofty forward expectations, Seagate's increase more closely resembles that of Apple (AAPL). Seagate has been much more thoughtful in its business plan execution and in firming up its financials as it has expanded.
In the past year, the company has increased overall revenues by almost 57%, $4.482 billion compared to $2.859 billion. The firm has also completed (and is in the middle of) several acquisitions that will allow it to have an even larger market share and presence in the hard disk drive space. Seagate also is in the middle of a massive share repurchase program. The firm plans to reduce the number of outstanding shares by 250 million by 2014, not to mention the 100 million shares that the company has bought back in prior years. This stock repurchase is also accompanied with a higher than average dividend that currently is yielding 4.20%.
These large share repurchases have helped push up the overall EPS (6.49) figures for the company and ultimately has pushed down the P/E for the stock, which is currently at 4.65. The company currently is sitting on $2.118 billion in cash, has a net profit margin of 22.60%, a book value of $8.83, and has a free cash flow of $2.616 billion. Seagate is easily the leader in the hard disk drive space and continues to position itself to continue that upward trajectory.
Unfortunately, no great company is without its problems, and Seagate is no different. In the past month, the company has been downgraded four times, with analysts citing weaker than normal PC sales. Seagate's stock has also been getting affected by the negative comments coming out of Intel (INTC), Dell (DELL), and Hewlett-Packard (HPQ) citing weaker consumer and business demand for PCs, accompanied with a slower than expected economy. Additionally, the overall market worries that continue to persist regarding Iran, the fiscal cliff, the presidential election, and tax/regulation uncertainties continue to pressure the overall market and will affect Seagate's stock price.
Looking past all of the current short-term negativities surrounding Seagate, I am still very optimistic on the firm's future regarding its business portfolio and overall market valuation. All of this bad news is not ideal for Seagate's stock price, but market negativity at times can create an excellent buying opportunity, and I feel that this is indeed one of those times.
When looking at the chart of Seagate, one can see that the stock has trended up for majority of the year, but while doing this, it has also created strong support and resistance levels that have been tested and have held several times over the course of the year.
Going back to February of this year, the $25 - $26 per share level seems to have been the core support level for the stock, with the $32 - $33 level representing the resistance level. With the stock currently at $30 per share, approaching the typical resistance level, and all of the recent negativities for both the company and the economy as a whole, I think there is a very good chance that the stock will sell off and retreat back toward its support price of $25 - $26 per share.
Now, for those that are frequent readers of my articles, they will know that I never like to just sit around and hope that the stock will eventually come down in price to my ideal purchase price. Instead, I like to look at the options market to help me slowly accumulate a position over time while still getting paid to wait for the stock to come down in price. I do this usually with selling of cash secured puts on the stock at the strike prices that I would prefer to buy the stock at.
Selling puts basically obligates the seller to purchase the stock at that price for the equivalent number of put option contracts that were sold (1 contract = 100 shares of stock). At expiration of the option contract if the stock is at or below the option's strike price, the seller will be obligated to buy 100 shares of stock for every 1 option contract sold at the option strike price, in other words the seller is being 'put' to the stock. If this happens, the seller is still able to keep the premium that was received for selling the puts originally. If the stock price is above your option strike price at expiration, the contracts expire worthless and the sellers get to keep the premium that they received originally for selling the puts.
In the case of Seagate, since I believe there is support in the stock price at the $25 - $26 level, I would be a seller of those strikes. I like the January contract month because it is roughly 4 months out and provides for a nice time premium as well as having a lot of the recent volatility being built into the option prices. With that said, I would suggest selling the $26 strike for $1.35 and the $25 strike for $1.10.
As for individual strike weighting, I feel that is always up to the sellers and their overall risk tolerance, but for this example, let's assume that 2 options were sold at each strike. Doing that would net the seller $490 in premium received for doing the trade, [($135*2) + ($110*2)]. This trade would also obligate the seller to potentially owning $10,200 of Seagate stock, with a breakeven of $25.50 per share. It is also important to keep in mind that the premium received for doing this trade would help offset some of that purchase price creating a 'real' purchase price of $9,710 and a 'real' breakeven of $24.275 per share. Again, this is assuming that both contracts were to expire in the money and be 'put' to the seller. If only one of the two contracts were to expire in the money and the trader was 'put' to the stock, the premium from the contracts that expired worthless would further offset the 'real' cost of owning the stock.
I like this trade as a potential way of entering into a position on Seagate because it offers me the possibility of a lower entry point than the current market price of the stock, as well as paying me to wait to be right. The premium that is collected for the trade creates a 4.80% rate of return (or discount if 'put' to the stock) for waiting to see how the price movement plays out. In the event that the options expire in the money and I have to buy the stock, I not only get to keep the premium that I received for doing the trade, but I now have a stock that is currently yielding 5.27% at my $24.275 breakeven. Overall, I see this trade as a win-win and I would be a buyer of Seagate at the $25 - $26 per share level.