As a part time market pundit there are few investing crutches that I hear that make me cringe the way “the stock is cheap” does. Stocks are cheap for a lot of reasons. And stocks that are in a highly cyclical business with a cheap core product that is massively commoditized are cheap for a really good reason. There are few industries as commoditized and cyclical to that of the disk drive business. This morning, Seagate (STX) reported fiscal Q2 results and Q3 guidance that was below street expectations, sending the shares down 8% as I write, off of the morning lows when it was down 11.5%.
A quick look at STX’s earnings over the last six years shows the massive earnings volatility from 2010 to 2013, and now a period of moderation, that by this morning’s guidance could suggest a cyclical downturn:
The miss and the guide down were not even that atrocious in sales terms, but the change in momentum and the decline in gross margin year over year is likely the sticking point.
So you will hear bulls defend the stock, come up with some short term reason for the hiccup, suggest the stock is cheap and should be bought.
And those that look at charts chose their own reason to pick a spot and defend the shares. The one year chart below shows the stock having recovered back to its 200 day moving average (yellow):
So don’t buy a stock like STX on a decline like today because it’s cheap. It’s always cheap. Instead, have a sense for whether or not we are likely to see a continuation in the trends that caused the Q2 miss and the Q3 guidance and then decide if you still think the stock is cheap.