How You Can Profit From The Fall Of This 'Old Tech' Company

Jared Levy's picture

Friday, October 13, 2017 - 12:00am

by Jared Levy

When I was 12 years old, my grandfather loaned me his classic Hasselblad camera to shoot photos in the park near where I grew up. The light was dim and I wanted to capture the colorful tree line that was swaying in the wind, so I loaded up some high-speed Kodak film and hit the road.

I knew I only had one chance to get that perfect light, perfect shot, perfect exposure. I wasn't worried; I had faith in Kodak and its quality products. But sure enough, I had some incorrect settings and the pictures were useless. Even then, I knew there had to be an easier way.

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Fast-forward to today and digital cameras (including higher-end smartphones) can turn even the worst photographer into the next Ansel Adams. On top of everything else, we no longer have to wait a day to see if we got perfect shot. 

Kodak simply couldn't see the changes coming. The rise of digital cameras and smartphones put the once-dominant company out of business. And shareholders who stuck with the company were likewise wiped out. 

Today, I see another technology company that could be doomed to the same fate as Kodak. Its technology is becoming obsolete, and sales have been sliding year-over-year since 2012. This target is scheduled to report first-quarter earnings on Oct. 23, and analysts have been dropping their estimates as we get closer to the date.

This Hard Drive Company Could Be Today's Kodak 
Seagate Technologies (Nasdaq: STX) is in the business of data storage. Seagate is a major player in its industry, just like Kodak was for cameras and film. The Dublin-based company is the second-largest maker of traditional rotating-disk hard drives (HDDs) overall and the largest provider of enterprise drives. 

There's an exponentially growing need for data storage around the world, but just as a growing number of photos didn't save Kodak, Seagate's problem lies both in its antiquated "spinning" technology and the sheer competition that's kicking down its doors.

There are literally dozens of makers of memory devices, and many of the heavy hardware hitters like Intel (Nasdaq: INTC) and Samsung also want a piece of the action. I mean, why would you sell someone else's technology if you could make it better, cheaper and more profitably yourself?

But the real threat to Seagate is newer technology. As traditional laptops and desktops with spinning drives like Seagate produces give way to cloud storage and solid-state drives (SSDs), Seagate loses more and more of its grip. SSDs, which are used in Apple's iPhones and Microsoft's Surface devices to name a few, are light years faster, more stable, use less power and are smaller than traditional HDDs.

So, why are companies like Seagate and Western Digital still making HDDs when the rest of the technology market is moving toward SSDs?

The answer boils down to cost. 

Just as the first mediocre digital cameras cost hundreds more than traditional film cameras, the newer SSDs are still about five times more expensive than their traditional HDD counterparts.

But in a pattern we've seen countless times before, SSD prices are falling fast, and with demand growing exponentially, prices are expected to fall even faster. This will not only continue to erode profits in Seagate's HDD business, but could lead to stiffer competition and price wars (which could but a bigger dent in profits). 

Some analysts believe that Seagate's recent appointment of Dave Mosley to the CEO position will somehow change the industry shift happening around it. But I don't agree, and neither do most respected analysts.

Another factor I found odd was that all three of the analysts who list STX as a "buy" are from smaller, lesser-known firms. The 26 who list it has a "hold" or "sell" include giants like J.P. Morgan, Barclays, Jeffries, and FBN. Wells Fargo recently suspended coverage. 

My point here is that the most respected analysts with the greatest resources don't have much faith in this stock, while a small handful of more aggressive analysts -- the kind who have a lot less to lose -- are putting their necks out for a Hail Mary play. 

The Numbers Predict A Selloff 
On top of everything else, Seagate's stock is expensive. Current prices around $34 are nearly double what they were in May 2016. And while STX's forward price-to-earnings (P/E) ratio of about 9 may appear low, it's actually fairly average for the company. 

As many analysts have stated, Seagate's falling sales are likely to hinder serious earnings growth, especially when the company has already been slashing costs for the past several years.

No, I think the only thing holding STX up is its attractive dividend yield (upward of 7% based on estimates for upcoming payments) and an overheated market that has failed to attract any logic.

The start of earnings season is when reality will set in. My models predict weakness in STX's results, which are scheduled to be announced before the market opens on Oct. 23. Even if it's only temporary, I believe a correction back to the $31.50 level is highly likely.

A 7.4% drop to that level would be enough for us to potentially capture 22.2% gains by January. And I've decided to buy a little more time just in case the market takes longer to come to its senses. 

How We're Raiding STX's Impending Drop
Readers of my premium newsletter, Profit Amplifier, and I are targeting a return to $31.50, which is only 6.0% below current prices. But rather than shorting the stock, we're using our "raiding" strategy to amplify that move into a potential 22.2% gain by January through the power of options. 

If I'm right, and the majority of analysts would back that up, our return will work out to a 77% annualized return. And even if I'm wrong, this trade breaks even at $32.50, just 4% under recent prices. All that would mean is that we'd have to wait a bit longer to fully profit from STX's demise.

Unfortunately, I have to save the specifics of this trade for my Profit Amplifier subscribers. It's only fair. But hear me out -- my proven strategy could be just what you need to get through the turbulent times ahead.  

With natural disasters and political turmoil shaking up an already volatile market, it's tough to pin down where you should be investing. But while the rest of the market has been sitting back and hoping for the best, my subscribers and I have spent the year raiding the market, taking more than our fair share of gains. I'm talking about returns of 35% in six days, 29% in four days, 31% in 10 days and 27% in seven days, just to name a few.

Bottom line, my stock market raiding technique is the best way to increase your returns while preserving capital and reducing risk. Of course, that's only if it's done correctly. 

That's why I created a special report that will walk you through the steps I take when going on market raids, which should help you avoid the costly mistakes many new traders experience. If you'd like to make trades like the one I described today -- or even potentially make 80% when a stock only moves 8% -- go here.

Jared Levy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.