There is a a bifurcation of haves and have-nots in the year to date performance in technology shares. Apple, Microsoft, Intel and Facebook have done much of the heavy lifting for the tech heavy Nasdaq, while once hot stocks/sectors like internet services and 3d printing have been left for dead. Not much has changed in the last few weeks since I highlighted Nasdaq breadth in a post titled ‘A Few Good Ten” on Nov 7th:
The top 10 holdings of the QQQ make up $2.4 billion in market cap, with 8 of the 10 up on the year on average of 29%, while the two decliners are down about 13% on avg. What’s astonishing is that the market cap of the top 10 holdings, which is heavy tech and biotech, are equal to the market caps of the last 90 components of the index. I would also add that BABA would be the 4th largest holding in the QQQ, which only reinforces the top heavy natrue of the index and how a few stocks have basically sucked the air out of many.
The Nasdaq 100 (QQQ) is up 19% ytd, outperforming the broader Nasdaq Composite (which has 2500 stocks in it) which is up only 13%. A handful of heavily weighted stocks are leading the indices higher. That’s all fine and good until investors look to ring the register in some huge gainers in the New Year.
I want to hit on two tech stocks that have flown under my radar, that make up a good bit of disk drive marketshare. Seagate (STX) and Western Digitial (WDC). The two companies have a combined $45 billion in market cap and almost $30 billion in trailing 12 month sales. The stocks are cheap, trading at a little more than 11x forward earnings estimates and about 1.5x sales, vs larger storage vendor EMC which trades at 14x forward earnings estimates and almost 2.4x sales.
But disk drives are commodity products and very prone to cyclical downturns. Which is one of the big reasons for the depressed multiples. Additionally STX and WDC are only growing earnings in mid single digits, likely the result of some hefty share repurchases. But sales are only expected to grow low single digits with flat gross margins. With both stocks within a couple % from the all time highs, I am not certain they have a ton left to run. And it’s not just me, STX Chariman and CEO just sold 92,000 shares at November 20th at $65, representing nearly half of his direct ownership, while Bloomberg lists that he holds nearly 1.4 million shares indirectly:
Back in September it appears that Luczo exercised options from a grant award to the tune of 481,000 shares. But since then he has sold all, starting with a sale of 375,000 shares on Oct 31st and 100,000 shares on Nov 4th, and then the sale of 92,000 two weeks ago:
WDC execs have been selling shares of late, despite offering a fiscal Q2 outlook that was below consensus (read here).
So the stocks are cheap, trading basically at all time highs, and insiders are selling. If you own these stocks and like to take cues from insiders, it is important to note that options prices are very cheap in both, with implied vol nearing 52 week lows, substantially down from the 52 week highs in Oct. So protection, or stock replacement strategies could be attractive.
STX 30 day at the money IV from Bloomberg:
WDC 30 day at the money IV from Bloomberg:
