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Tech Guru: Disk Drive Stocks WDC, STX Are Bargain Buys

Miller: Disk drive sector not as woeful as most think

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Q: You call drive stocks the “Rodney Dangerfields” of the tech space. What are a few unsung stocks you think investors should take a closer look at for their portfolios, and why?

A: Investors are being too paranoid about the effects of the flood. They are missing the power of the recent consolidation moves in the industry, and growing worldwide demand for storage. We modeled both Seagate and Western Digital after their respective mergers — with pre-flood drive ASPs and margins — and came up with a post-recovery earnings range of $5.75 to $6.60, sans flood effects. Historically, these stocks trade in a forward P/E range of 7 to 11. Not only are they cheap, but we have them generating impressive free cash flows over the next two years — $5 to $6 billion — which can be used to buy back shares or pay a higher dividend. We also believe drive suspension supplier Hutchinson Technology (NASDAQ:HTCH) is on the verge of a major turnaround.

Editor’s Note: HTCH is a microcap stock that trades on very thin volume, and a very aggressive stock. Do not consider a trade for any equity of this nature without using a limit order to protect your entry price.

Q: Even if your logic is sound on the strength of the drive industry and these individual stocks, do you have fears that, generally speaking, we are seeing a lot of overbought tech stocks? Should investors wait for a pullback, or do you think now is the time to get in despite dramatic run-ups in the last few weeks?

A: Certainly with STX trading at a P/E of 3.1 on FY13 consensus numbers and WDC at a P/E of 4.8, we don’t see either as overextended. Even with the post-flood recovery, estimates sans flood effects, the stocks are still cheap. Yes, STX is up from high single digits in October, but that low valuation was far more irrational than today’s price. We are projecting upside in the March reports for both Seagate and Western Digital. We also see several upside factors for STX longer-term, including the ramp of eight, new lower-cost products, reduced warranty costs which cut into this quarter, the internal supply of heads and media to Samsung drives which improves gross profits by $4 per drive, the hybrid drive opportunity and the improving macroeconomic picture.

Q: Any final thoughts to share that we haven’t covered?

A: Investors need to look beyond the flood and understand the long-term benefits of the recent industry consolidation moves in conjunction with the world’s ever-growing appetite for storage.

Jeff Reeves is the editor of, and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace?.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff did not hold a position in any of the aforementioned stocks.

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