Cody is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When you look at the chart history of a strong tech stock, it looks like a child's drawing of mountains or volcanoes: sharp rises and falls with some squiggle lines in the middle to indicate the snow or lava, while generally trending upward.
You see the avalanches and eruptions of stock prices and feel like you are either covered under a mountain of snow or that you are shooting into the sky. Granted most people don't want to be anywhere near a volcano when it is erupting, but for the sake of the analogy, let’s just say that being launched into the air is a good thing when talking about money.
But how do you know when the proverbial volcano is about to erupt? With so much volatility in tech stocks, it can be difficult to know when to buy in and ride the blast or when to wait out the avalanche. At the heart of value investing is making a purchase when the company is undervalued. Western Digital Corporation (NASDAQ: WDC) is a very strong company with tremendous outlook over the next few years. I believe that this could be the next proverbial volcano.
I realize that is a big statement, but like a truck unloading its contents, I will back it up.
WDC sells hard drives and solid state drives virtually everywhere. For a specific list of what their drives are a part of, I suggest you look here. WDC recently completed the purchase of Hitachi Global Storage Technologies (HGST), solidifying ownership of just over 40% of the market. The disk drive industry took a big hit with the flooding in Thailand last year. In December of 2011 WDC began turning the lights back on in their facilities and they expected to be back at normal production levels in March 2012. With that goal now reached, WDC is back at full strength and they will be ready for the oncoming waves of sales. During the recession every company was trying to cut back costs wherever they could. One of the first to go (and still on its way back) was computer upgrades. While there is still debate as to what direction the economy is heading, I believe companies are ready to upgrade their old computers. Guess who stands to gain from that? You got it, WDC.
If you aren’t sold yet, picture this: same situation, but instead of owning a company that has just over 40% of the market, you own two companies who together have 90% of the disk drive market. Seagate Technology (NASDAQ: STX) is the main competitor of WDC and sells a higher-end disk drive. So now you own companies that control 90% of the disk drive market, where one company makes higher-end items and the other makes quality and cost friendly items. Oh, and the technological world will absolutely need their products in the next 15 years. Demand is only expected to dramatically increase over this time period. WDC and STX literally have their hands in everything technology based, from military and medical technology to external storage devices and personal computers.
So there you go. Two incredibly solid companies that are the giants of their industry and together make up 90% of the industry (did I mention that yet?). However, there is a correct time to buy these companies. Like many tech companies, they will move up and down very quickly. I believe WDC is currently in a good range to purchase with their recent avalanche. I would suggest purchasing it between $25 and $32 per share. The price has come down dramatically since May and I don’t believe it will come down significantly more in the near future. STX is a different story. If you look at its price over the last few years, you will see that it has been trending up. I would wait for a more dramatic drop in price. It has been coming down over the last couple months but I would wait to see if it makes another move down like it did in May. Like I said earlier, you want to watch the avalanches from a distance and ride the eruptions from a front row seat.
CWTerrill owns shares of Akamai Technologies and Seagate Technology. 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.If you have questions about this post or the Fool’s blog network, click here for information.