Call Options Or Put Options On Seagate Technology (STX)?

| December 5, 2012 | 0 Comments

STX OptionsSeagate Technology (STX) is one of the world’s largest manufacturers of hard disc drives.  As you know, hard disc drives are the most common way to store data on computers and other electronic devices. 

STX currently trades for $27.94 per share.  The shares have recently fallen 20% from the 52-week high of $35.32, but the shares are up a whopping 93% from the 52-week low of $14.13.

Is this an opportunity to buy call options on STX as they take market share from competitors?  Or should you buy put options on STX as demand for hard disk drives evaporates?

The bulls make a convincing argument…

STX’s products are primarily used in desktop and notebook computers, but they’re also used in consumer electronics and enterprise data storage systems.  This relatively inexpensive technology is the workhorse of data storage.

They’ve seen tremendous growth as consumers replace desktop computers with notebook computers.  And it’s allowed STX’s sales to grow faster than their peers.

In fact, STX is an unbelievable value.

Get this, the stock trades at a lower Price to Earnings, Price to Projected Earnings, Price to Book, Price to Sales, and Price to Cash Flow than the industry average.

In other words, STX is cheap.

What’s more, STX pays a sizeable dividend that they just increased.  STX now pays an annual dividend of $1.52 per share.  At a recent price of $27.94 per share, their dividend yield of 5.4% is one of the highest around.    

Put simply, STX is a great value and they pay a big dividend.  That’s a combination that’s too good for value and income investors to pass up… and should lead to a higher stock price in the weeks ahead.

But the bears have a compelling case as well… 

Look, STX is cheap for a reason…They make hard disc drives.

To put it nicely, it’s a mature segment of the technology industry with limited growth and lots of competition.  That means tight profit margins and little room for error.

More importantly, new technologies are destroying their end market.

Solid state drives are fast becoming the data storage device of choice for enterprise data storage systems.  They use less energy and are more reliable than hard disc drives.

And we all know how tablet computers are decimating the PC and notebook markets. 

But here’s the thing… 

Tablets don’t have hard disc drives.  They run on NAND flash memory.  As consumers shift from PCs to tablets, it’s decimating any hope for revenue and earnings growth. 

And without growth, STX is doomed to continue its slump that’s already knocked 20% off the price over the last three months.

If you think the bulls are right, take a look at buying the STX March 2013 $30.00 calls for around $1.60.

If you think the bears are right, take a look at buying the STX March 2013 $26.00 puts for around $1.70.

Good Investing,

Corey Williams

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Category: Call Or Put Options?

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.