Two Investment Calls That Make Sense for Retail Investors
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On Monday shares of recovering stocks Western Digital (NASDAQ: WDC) and Seagate Technology (NASDAQ: STX) rallied after being named as part of Barron’s Top 10 Picks for 2013. Both stocks had seen substantial selling pressure in the last few months, but have seen some signs of recovery in the last two weeks. After looking at the fundamentals, you almost have to agree with Barron’s, these are two stocks with great upside heading into 2013.
In last year’s Barron’s Top 10, Seagate was included as a stock to buy. Looking back, Barron’s was right, as the stock has returned a gain of 76% in 2012, despite its near 20% pullback during the last four months. Now, the stock, along with Western Digital, remains deeply undervalued heading into 2013 and looks well-positioned for large returns.
According to Barron’s, both of the hard drive makers present upside because they have rock bottom valuation, strong balance sheets, and Seagate pledges to return 50% of free cash flow to shareholders. Barron’s also likes the ongoing growth in storage demand despite falling PC sales. They also believe that with a combined 80% market share, both companies have stable pricing which is attractive to consumers and the companies that utilize their products.
Now that you know the reasons that both stocks made the list, let’s look to see if their right.
The information above is not enough alone to determine whether or not a company would make a good investment, but it is a good start at determining the valuation. As you can see, both companies are incredibly cheap compared to both sales and income. These metrics alone tell you that Barron’s is correct in their assessment of “rock-bottom valuations”.
Strong Balance Sheets
A strong balance sheet is a measurement of a company’s efficiency, and there is no measure more so than the returns on both equity and assets. These metrics show that a company is making good investments and returning large capital on the investments. Both Seagate and Western Digital return large gains from their assets/equity, have strong cash positions, and low debt compared to their assets. Therefore, once more, Barron’s hit a home run on this one, because both companies do have exceptional balance sheets.
The primary reason that both Western Digital and Seagate have fallen over the last few months is because of weakness in the PC market. Back in October analysts were cutting outlooks on a daily basis as computer companies Dell and Hewlett-Packard (NYSE: HPQ) expressed weakness. Both companies then validated the concerns with earnings. Hewlett-Packard posted a 14% year-over-year drop in PC revenue and a 12% drop in shipments, which suggest further issues. Dell’s quarterly report wasn’t much better, nor was its guidance, and these factors all contributed to the loss in value for both Seagate and Western Digital.
The PC market remains challenging, but not dead. There are still people buying computers and laptops, and both companies benefit from these sales. However, in cloud storage, both Seagate and Western Digital also benefit. The cloud is one of the fastest growing segments in the economy, and this data is stored on the drives of both Seagate and Western Digital. Therefore, despite the fact that neither company directly benefit from mobile/tablet storage, they do indirectly benefit because of the cloud. And with this being a growing space, both companies could see significant growth in the years that lie ahead.
One of Barron’s final argument for these stocks being great in 2013 is in regards to giving back to shareholders. Both companies are investor friendly, with Western Digital recently accelerating its dividend payment and Seagate increasing its yield by 19%.
Seagate continues to remain one of the more investor friendly companies in the market. It repurchases shares and pays dividends at a high yield. Barron’s mentions 50% of Seagate’s free cash flow, which would be more than $1 billion in annual contributions to shareholders.
In my opinion, because of the valuation presented, the strong balance sheets, the growth of the cloud, and the generosity of the boards, both Western Digital and Seagate are great investments. At current prices, there are few risks and much reward, and Barron’s did a good job at highlighting these catalysts, which should return large gains in 2013.
BrianNichols has no positions in the stocks mentioned above. 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!