5-Year Return: -1%
YTD Return: +63%
Don’t let Seagate Technology (NASDAQ:STX) fool you with its outperformance. This stock has been a big momentum play in 2012, but that ride is about to come crashing to a halt for two reasons.
In the short-term, the easy YOY comparisons due to supply chain disruption in 2011 are ending. In the long-term, this disk drive stock will come to grips with the secular reality of a post-PC age and the rise of flash memory technology.
Consider that in its most recent quarter, Seagate reported EPS of $1.45 a share — far short of the $1.67 forecast. And the only reason sales didn’t disappoint was because the guidance was lowered in advance of the report. Margins were soft, enterprise sales were weak and that old boogeyman of “global macroeconomic uncertainty” was blamed for sapping momentum. Seagate actually is off 20% in the past three months as a result.
The hard reality is that Seagate stepped over some very low bars earlier in the year thanks to supply chain disruption in 2011 caused by flooding in Thailand. The result was better margins, some pent-up demand and easier year-over-year comparisons. This lulled some folks into a false sense of security — sending shares up 240% from lows in September 2011 to this year’s peak back in May.
That clearly was overly optimistic, and now the fundamentals are deteriorating. Margins are soft, the total available market is stagnant at best, and competitor Western Digital (NASDAQ:WDC) has eaten into some of Seagate’s market share.
Long-term, the growth of hard disk sales is going to be much harder to come by. As with HP, you have a nice dividend in STX right now (4.5%) and a pretty solid balance sheet. This company won’t evaporate in 2013, but it won’t deliver big gains, either.
Seagate is moving onto new things, to be sure. The company plans to introduce new enterprise and ultra-thin hybrid hard drives going forward and wants to get into solid state disk drives more ambitiously. But whether those efforts come to fruition in time to help out current investors is doubtful.
If you haven’t cashed out of Seagate yet, do so before the music stops and the company makes another leg down.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he held a long position in Apple but none of the other stocks named here.