In the annual Barron's Roundtable of leading investment pros, Fred Hickey, editor of the High-Tech Strategist, explains why he's sees flash memory maker SanDisk as a compelling short at this time:
SanDisk has been tough to short. It's running up on rumors it will have blowout earnings when it reports Jan. 26. The stock was up 152% last year, to 63, and 18% in the first week of January, to 74. It is the world's largest supplier of flash storage cards. It sells primarily NAND flash, used in MP3 players and digital cameras. The stock sells for six times book value, six times sales, 42 times trailing earnings and 32 times '06 estimates.
If the consumer slows in 2006, the whole industry will be under pressure. Many NAND flash players in Asia, including Samsung, are expanding production. We are seeing a slowdown in the retail flash-card growth rate. Some traders of memory are dumping their flash products now. There is a chance we'll see a bloodbath. SanDisk, too, has had insider selling. There were 23 insider sales in the past six months, of nearly a million shares. Also, the company is involved in a number of lawsuits involving threats to its patents. Royalties account for 40% of profits, and that royalty stream might not stay intact. The company lost a recent court case, and the stock got hammered after running up wildly in anticipation.
SNDK 1-yr chart: