Chart of the Day x2 – WDC Lower Highs of Late

by Dan September 10, 2013 3:20 pm • Commentary

Western Digital (WDC) is up 1% today, a day after acquiring private Flash Storage maker Virident for $685 in cash placing the hard disk drive maker in clear competition with established storage vendors EMC and NTAP.   Disk drive makers historically trade at ridiculously low multiples due to cyclicality of the business that can cause extreme pricing pressure from the hardware vendors they sell into.

WDC trades at 8x next year expected earnings of ~$8, which analysts forecast should essentially be flat year over year along with sales.  While overpaying for small private companies is what large cap tech companies with no growth do, WDC has a very solid balance sheet with 23% of their balance sheet in cash (~15% net of debt), so investors are likely giving them a little room on the deal that the company suggested will be accretive in calendar year 2015.

Despite WDC being a monster ytd, up 56%, and up more than 100% from the 52 week lows made last fall, the recent technical pattern could be showing some signs of exhaustion.  The one year chart below shows a series of lower highs (green line) since making new all time highs in July.

WDC 1 yr chart from Bloomberg
WDC 1 yr chart from Bloomberg

The red line above shows a fairly key near term support level at about $60, while the line in the sand for bulls should be the $55 support level, just above the 200 day moving average (white line).

As I said above, WDC is a cheap stock with a good balance sheet that pays a dividend that yields 1.5%, with fairly neutral sentiment from the Wall Street analyst community (13 Buys, 13 Holds and 3 Sells).  The stock doesn’t scream short, but the potentially declining technical set up could cause of re-test of prior support as we head into or out of Q3 earnings.  I would add one more thing, it looks that the volume increases on down days and is lighter on up days, which could signal investors with itchy trigger fingers.