BAIT SHOP Update on Western Digital (WDC)

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24/7 Wall St. has a BAIT SHOP report of potential buyout candidates, and this morning we sent out an email update to our free email subscriber list regarding Western Digital (WDC).

Current market action suggests removing HALF of a position off the table in Western Digital (WDC) is worth merit and the prudent thing to do.  I admit that there is really no way around calling this a "chicken-bull" strategy and may be a cheap way to still lock in on part of a 12.6% gain.  What has changed is that the market reaction to tech earnings is poor (at best) out of the gate and the basic guidance ahead and margin pressure is causing what may be overreactions on the downside.

WDC reports earnings next week and they are obviously not the leader in the disk drive space like Seagate (STX), so using the Intel-AMD and other PC-Chip-Storage news reactions is a safer call for the near-term.  Ultimately a deal for this company could come, so there is no huge call or major change here on a longer-term basis.  But taking half of the gain off the table won’t hurt with the 12.6% gain since the first call and the likely scenario is a chance to back in at a lower price than today.  The chart has actually held up for longer-term views, but the feel out there gives this more merit than the exact trading in the stock.

I have no issue at all with the valuations on WDC.  The stock still trades at roughly 11-times forward earnings, the balance sheet is still healthy, and there is still a substantial amount of cash and cash flows that could be used to fund a hefty dividend to a private equity buyer.

This will be revisited and almost certainly added back to a full position in the fairly near-future, and as noted this is merely noting that taking half of the position off the table is the prudent thing to do.  It is very possible that the company will prove the initial calls correct and prove today’s decision wrong.  That is part of the great game.

We’ll revisit this shortly, so keep it on your watch lists and watch out for updates here.  There are a couple of links below showing the reasoning and rationale for the original calls.  We recently sent an email noting that it was still ok after a brief drop and gave a note back in November that the position was still ok, but this time doesn’t feel the same as far as the grandiose stance.  Call it a "chicken-bull" stance if you want, but it is what it is.  I still feel that unless there is a pure unforseen technology spending evaporation that WDC could easily fetch $24.00 to $25.00 or even more in a potential acquisition, but that doesn’t mean anything is anywhere close to imminent nor is there any knowledge of anything in the works. 

If you would like further updates to our free private email list regarding BAIT SHOP candidates and other special situation investing please send an email to jonogg@247wallst.com and title the email SUBSCRIBE.  We value privacy and do not share our email lists with any third parties.  If you already signed up and did not get an email this morning it is possible that filters screened it out and some email addresses are not immediately added to the list.

Jon C. Ogg
January 18, 2007

NOVEMBER Update:
Western Digital (WDC):  We added Western Digital as a full BAIT SHOP member at $18.20 on September 29, 2006.  Right now, we see no reason to make any change to this stance that it should be acquired.  The price appreciation from $18.20 up to today’s $21.00 is more symptomatic of the PC-related and tech/storage environment than it is a buyout, and this can still be acquired by private equity firms or by a myriad of foreign players that could go after Seagate’s (STX) sharp dominance.

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