The Computer Storage Industry Remains a Value Investor’s Goldmine, Regardless of Recent Gains

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After months of consistent loss, three of the most tracked computer storage device stocks moved higher by a significant margin. Some investors are now wondering what’s moving these stocks, and if it’s time to buy?

What’s Moving?

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>Ticker</p> </td> <td> <p>Wednesday Gains</p> </td> </tr> <tr> <td> <p><strong>OCZ Technology</strong></p> </td> <td> <p><span class="ticker" data-id="224114">(NASDAQ: <a href="">OCZ</a>)</span></p> </td> <td> <p>12.50%</p> </td> </tr> <tr> <td> <p><strong>Western Digital</strong></p> </td> <td> <p><span class="ticker" data-id="206043">(NASDAQ: <a href="">WDC</a>)</span></p> </td> <td> <p>8.10%</p> </td> </tr> <tr> <td> <p><strong>Seagate Technology</strong></p> </td> <td> <p><span class="ticker" data-id="220462">(NASDAQ: <a href="">STX</a>)</span></p> </td> <td> <p>4.00%</p> </td> </tr> </tbody> </table>

Although each of the three companies trade in the same industry they are broken into two different segments. OCZ Technology is a solid-state drive (SSD) company, which has to do with smartphones, tablets, and other new-age media storage devices. Both Western Digital and Seagate focus on hard disk drives (HDDs), which is storage for laptop, PCs. DVRs, game consoles, supercomputers, etc. Therefore, the drivers for these stocks are different, yet on Wednesday the three traded as one.

  • The cause for OCZ Technology’s rally on Wednesday is hard to determine. There was no news. However, the stock continues to trade higher following news last Tuesday, after the company announced a new line of Vector SSD lines. The company’s previous Vector did not use an Indilinx controller, and some have attributed its disappointing performance to this absence. The new line includes the Indilinx controller, and investors obviously believe this new line will perform better. As a result, OCZ is trading higher by an unprecedented 63% during the last five days, and is yet to show any signs of slowing down.
  • During the last two days both Seagate and Western Digital have posted gains of more than 8%, with very little news. The rally might have been sparked by Western Digital announcing that it was accelerating its dividend payment. Last week Seagate announced a dividend increase of 19%, bringing its forward yield to 6%. Therefore, it is possible that a late reaction occurred for both stocks.

Is it Time to Buy?

With the absence of any significant news, the most logical reason for these three rallies was each being oversold. Some are saying the rally was sparked by Western Digital’s dividend announcement, however the company announced the news on Tuesday and saw little movement. Therefore, considering the valuation of these companies it makes sense that this was a result of attractive valuations.

Both Seagate and Western Digital operate in high margin businesses, have sizable cash balances, and are currently trading at just five times next year’s expected EPS. In other words, both are very cheap. In regards to OCZ Technology, it is cheap as well. Despite its large five day rally the stock trades with a price/sales of 0.33 and has seen consistent top-line growth of more than 50%. The only difference is that OCZ is a speculative company, and the SSD business is a high cost low margin space.

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>Three Month Performance</p> </td> </tr> <tr> <td> <p>OCZ Technology</p> </td> <td> <p>(60%)</p> </td> </tr> <tr> <td> <p>Western Digital</p> </td> <td> <p>(13%)</p> </td> </tr> <tr> <td> <p>Seagate Technology</p> </td> <td> <p>(15%)</p> </td> </tr> </tbody> </table>

As you can see, regardless of recent gains each of these stocks is still trading with excess loss. Both Western Digital and Seagate are well-established companies that are going to remain profitable and continue to give back to shareholders. I believe that both would be a “buy” right now at current prices for the long-term investor. OCZ Technology is a speculative play, and after the large loss investors are hedging their bets in hopes that its new line is more successful with better components. Therefore, my final conclusion is that all three are cheap, but Seagate and Western Digital present the most safety and the likelihood for consistent gains. Meanwhile OCZ Technology is more of a risk at the moment, and may slightly pullback due to its recent gains. My suggestion is to perform your own due diligence and determine how each stock would fit into your portfolio, and if you’re a value investor, these stocks might be your goldmine. 

Brian Nichols has  a long position in STX.  The Motley Fool owns shares of Western Digital. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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