The Contrarian Blog
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Publication: "Kiplinger"
Publication title: "An Old Tech Lion Roars Back"
Publication Date: 6/28/2012
Brief Summary:

The author of this article applauds Seagate Technology PLC (NASDAQ:STX - 25.24) for staging a rebound following the 2011 flooding in Thailand. The natural disaster put a sector-wide crimp on the bottom lines of disk-drive makers. Seagate has bounced back nicely, contends the author, due in part to "industry consolidation and pent-up demand for its disk drives."

In fact, Seagate's durability can be seen in its recent string of earning wins. In its fiscal third-quarter earnings report, for example, the company posted a profit of $2.64 per share -- 10 times what it recorded on a year-earlier basis. For the current quarter, analysts are projecting a lofty per-share profit of $2.72.

It is here that doubts about STX's sustainability begin to creep in. The author challenges these impressive growth rates, suggesting they could be the result of skewed pricing of hard-disk drives due to flood-induced supply issues. In addition, the company's most recent earnings results may have been impacted by Seagate's 2011 acquisition of Samsung's hard-drive division, which "helped fuel profits."

Additionally, the author sees some headwinds down the road, as languishing PC sales could disrupt the company's top revenue source. The author additionally cautions against STX's venture into the cloud-computing business. Although a number of cloud-driven data centers currently use Seagate's drives, analysts remain wary of the company's long-term durability in that market.

Contrarian Takeaway:

On a technical basis, STX has had a dramatic showing on the charts. After tagging a two-year low of $9.05 on October 4, the stock rallied 260% to tap out at an all-time high of $32.55 on May 1. After hitting that technical milestone, STX pulled back to its 180-day moving average -- a trendline that has alternately served as support and resistance. Even against this recent downturn, the security still boasts a formidable 54% year-to-date gain.

Despite STX's heady advances, Wall Street remains skeptical of the stock. In the options pits, the equity's 50-day International Securities Exchange (ISE)/Chicago Board Options Exchange (CBOE)/NASDAQ OMX PHLX (PHLX) put/call volume ratio of 0.70 ranks higher than 98% of other such readings taken in the past year. In other words, puts have been bought to open over calls at a near-annual high clip in recent months.

Outside of the options pits, short sellers are changing their tune on STX. Short interest decreased 10.9% in the most recent reporting period. However, short interest still accounts for 4.8% of the stock's float, pointing to an ample amount of available sideline cash.

In fact, with 11 out of 19 analysts still maintaining a "hold" or "sell" suggestion on the stock, a round of upgrades could prompt an additional group of bears to jump ship -- giving the equity a short-term boost.


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