The technology sector is back in favor on Wall Street. The Technology Select Sector SPDR Fund (NYSEARCA:XLK) is up almost 25% this year yet Seagate Technology PLC (NASDAQ:STX) is down 10% for the same period. What I am trading today is the possibility that there is value in this sector laggard.
We currently live in a world that is fast becoming more dependent on technology than ever. We need it for every aspect of our daily lives. Barriers to entry into the tech components sector are somewhat high, so the players like STX will all likely prosper for the next few years.
The demand for data has never been higher, so the demand for storage should continue to expand.
Fundamentally, STX stock is not expensive at a 13 price-to-earnings ratio. This is especially true in the tech sector, where valuations tend to get out of hand on Wall Street.
Compared to its competitors, Seagate Technology is incredibly cheap as it sells it at less than one third the P/E of Western Digital Corp (NASDAQ:WDC) and less than one half of that of SanDisk Corporation (NASDAQ:SNDK) to name two.
I understand that there are nuances and headlines, but in the long run most of the suppliers will head in the same direction. The bottom line is that I see STX value here and I want to monetize it for me.
Currently, STX stock is trading $3 below the average Wall Street price target. But that is misleading because almost all analysts have a hold rating on the stock. This is somewhat good news for bulls, because if there were to be a surprise headline it would be one for an upgrade rather than a downgrade.
The support zone below current price — that is to say the area between $28 and $32 dollars per share for STX — has been in contention since 2003. It wasn’t until January of 2013 that the bulls were able to overcome the resistance.
What followed was a 100% rally that peaked at the end of 2014. Unfortunately for the bulls, the bears were able to take it all back and then some. STX then bottomed in may of 2016 which also gave birth to another massive 150% rally. But that too ended in tears with a 40% drop.
Click to Enlarge So here it is at $34 per share and battling over this five-year-old area of contention. Obviously neither the bulls or bears are willing to give it up easily. If the bulls are able to prevail this time, then the upside potential should be around $40 per share.
I want to capitalize on this potential. But I am not one to buy and hope for a rally. Instead I prefer to bet on proven support and create income with no out-of-pocket expense.
In this case, I see recent support around $28 per share that dates back to 2016, and therein lies my opportunity. This is basically a rinse-and-repeat from several times this year. I learned not to overstay my welcome in winning trades.
STX Stock Trade Idea
The Bet: Sell STX Mar 2018 $27 put and collect $1. This is a bullish trade that has an 80% theoretical odds of giving me maximum gains. But if price falls below my strike then I accrue losses below $26.
Not everyone is comfortable selling naked risk and for those, they can sell a spread instead.
The Alternate Bet: Sell STX Mar 2018 $27/$24 credit put spread and it would yield 20% if successful.
I either case I don’t need a rally to profit. I can retain maximum gains even if Seagate stock falls an additional 20% from here.
Investing in stocks is risky and regardless of how careful I am, I never bet more than I can afford to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.