Xyratex: The Best of Times to Buy/Write

| About: Xyratex Ltd. (XRTX)

From "These Are the Best of Times" by Styx:

The headlines read "these are the worst of times"

And I do believe it's true

I feel so helpless like a boat against the tide

I wish the summer winds could bring back paradise

Buy I know, if the world turned upside down

Baby, I know, you'd always be around, my, my

We are re-entering our virtual buy of Xyratex (NASDAQ:XRTX) using Phil's basic Buy/Write strategy to buy a half position, sell puts to potentially fill the other half of our long position, and sell calls against the stock as a hedge.

Xyratex Ltd. was one of the first buys in our VIRTUAL DARK HORSE TRADERS' HEDGE portfolio (DHTH) back on July 1, 2010 when we began this adventure of creating a long-term, long/short portfolio choosing stocks based on Sabrient's research and using Phil Stock World's Buy/Write strategies.

Since then, we have witnessed growing interest in the storage sector with Dell Inc. (NASDAQ:DELL), Hewlett-Packard Company (NYSE:HPQ) and other companies heating up the acquisition trail. Meanwhile XRTX continues to churn out profits and trade at a value based p/e of 4.5. XRTX has maintained a top spot in the Sabrient VCU (Value Change Up) Ranking System and checks in this week in the #1 spot. With strong growth, value and momentum scores, Sabrient System's rates it a strong buy:

Company Profile

Xyratex Ltd. is a provider of modular enterprise-class data storage solutions and storage process technology. It designs, develops and manufactures technology that provides its customers with data storage products to support storage and data communication networks. Xyratex operates in two business segments: Networked Storage Solutions (NSS) and Storage Infrastructure (SI).

Earnings and Revenue Update: For the quarter ended August 31, 2010, Xyratex reported earnings of $37.1 million or $1.23 per share compared with $43.7 million or $1.45 per share for the prior quarter and $7.8 million or $0.26 per share for the same quarter one year ago. Revenues were $428.8 million for the quarter ended August 31, 2010 compared with $455.9 million for the prior quarter and $246.3 million for the same quarter one year ago. Last twelve months' earnings were $3.62 per share compared with $-2.78 per share a year ago. Last twelve months' revenues were $1.4 billion compared with $910.3 million a year ago.

Sabrient Analysis

Sabrient rates XRTX a Strong Buy for its superior scores for growth, value and momentum, three important metrics that indicate future market outperformance.

  • Growth: XRTX scores very high for growth potential, with a Sabrient Growth Score of 96.0. This reflects the company's exceptional earnings performance and expectations and makes it an excellent candidate for the growth-minded investor.
  • Value: Also, a score of 85.3 for the exacting Sabrient Value Score indicates that XRTX may be undervalued at its current price.
  • Momentum: A Sabrient Momentum Score of 80.5 reflects a bullish profile for XRTX's composite measure of price, earnings and group momentum.
  • Timeliness: XRTX has a Sabrient Timeliness Score of 45.4. This measures technical strength based on short-term and long-term price performance and long-term group strength.

In Sabrient's analysis, XRTX is undervalued at these levels making this "The Best of Times" to recommend entering this position. Its next earnings announcement will be after the bell on January 6, 2011, and it is expected to earn +$0.74.

We originally bought our virtual shares of XRTX on July 1, 2010 at $14.64. The stock trades today at $15.51. The DHTH virtual portfolio wrote a Dec $12.50 call against the original shares, and consequently, its stock would have been called away for a slight loss (net of buying the stock cheaper, but selling the call options while the stock was at a low point in its recent trading range - bad timing). So we are interested in trying again. We are re-entering XRTX using Phil's Buy/Write Strategy which has created many profitable trades in the virtual DHH portfolio.

We will buy 300 shares (1/2 position) and sell 3 March $15 calls to reduce our cost basis by ($1.80). We will also sell 3 March $15 puts, further reducing our cost basis by ($1.50). Thus, we will enter XRTX today with a cost basis of about $11.90. (For each 100 shares of stock, we SELL 1 call and 1 put.)

By using Phil's Buy/Write Stategy on a VALUE stock selected by Sabrient Systems we are able to buy a cheap stock 15-20% cheaper.

  • BUY XRTX, at the market, December 17, 2010
  • SELL XRTX Mar $15 call, at the market (approximately $1.80), December 17, 2010
  • SELL XRTX Mar $15 put, at the market (approximately $1.50), December 17, 2010

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

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Tagged: , Data Storage Devices
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