Seagate Technology PLC (NYSE:STX) reports earnings this Wednesday, May 1, and based on the stock’s resistance level and the declining trends in spending within the tech sector, it seems like this is a good time for an attractive downside play.
Within STX’s group, fewer than half the stocks have beaten top line estimates, which have already been generally downgraded since the same period last year. Stocks like Dell Inc. (NASDAQ:DELL), Hewlett-Packard Company (NYSE:HPQ), and IBM (NYSE:IBM) have already been trending lower following earnings while STX has rallied back to resistance. With negative reports from EMC Corporation (NASDAQ:EMC) and VMware, Inc. (NYSE:VMW) now out, some traders have had a hard time explaining the contrary movement. It seems there is a little overpricing going on in STX as traders sell out of non-yielding stocks in the sector first.
STX does pay an attractive dividend and that has likely helped the firm defend against recent market volatility. However, it can’t do much about an earnings or revenue miss when they report. It has also helped to have a share-repurchase program running to soak up some of the excess capital the company has been holding but can spend on growth initiatives. Overall, this looks like a stock that has been able to fight the overall trend within the sector through an attractive yield and buybacks, but has now been placed in a very precarious position. That makes for a very attractive risk/reward profile on the stock.
Recommendation: Buy to open the STX June 36 Puts (STX130622P00036000)
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