Western Digital Offers Great Value

C) Growth Breakdown

There are a variety of different growth metrics that have been shown to predict stock returns. Most important among them is price momentum. Winning stocks keep winning, and losing stocks tend to keep losing. Western Digital's growth profile is shown below:


WDC has managed to overcome weakness from the computer & peripherals group over the last six months (-4.43%), gaining 6.57% versus 4.48% for the technology sector and 0.34% for the overall market. WDC was even stronger over the last twelve months, gaining 21.5% versus 3.5% for the Technology sector and 2.5% for the overall market. WDC leads the industry in profit growth (annual EPS growth of 68%), which is much higher than the industry group (-41%), technology sector (3.7%), and overall market (17.3%) averages. This is also a much better growth rate compared to its main HDD rival - Seagate Technology (NASDAQ:STX) - that had annual EPS growth of -6%. The company is also relative efficient, returning 18% on equity and 10% on assets. Once again, these stats are much better than the industry group, sector, and overall market averages. Overall, Western Digital is a "Moderate Growth" company and we expect the stock to generate 2.94% of alpha attributable to growth, over the next twelve months.

D) "Smart Money" Breakdown

In addition to value and momentum, we will also analyze how the "smart money" on the street is playing Western Digital. We consider the "Smart money" to be short sellers, company insiders, and institutions. Each of these stakeholders tends to be much more sophisticated than the average investor and thus their transactions give good clues of what is to come. We have found loads of academic research showing that short sellers,company insiders, and institutions all predict stock returns. This "smart money" breakdown for WDC is shown below:

Looking at the table above, it seems that company insiders have been dumping the stock over the last six months (-29% in ownership). While this is disheartening at a first glance, a further look into the individual company insider transactions reveals two things. First, the majority of the insider selling comes on the same day that those same insiders execute options. This is natural and mimics the pattern seen in other companies as insiders will execute options and sell them for instant cash. Secondly, this pattern of insider selling has been consistent for the last 10 months. While this could be a worrying sign that company insiders have been dumping the stock for the last year, you could also interpret this as evidence that the recent company insider selling isn't anything to be worried about. If company insiders were selling western digital when the stock was below $86, and its now at $106 after hitting a high at $114, then their transactions haven't been very indicative of future performance.

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Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in SPLS over the next 72 hours. The author wrote this article themselves, and it expresses their ...

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