Seagate Is 1 of 2012's Stock Superstars

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The first half of 2012 is in the rearview mirror, and investors are gearing up for what looks to be an action-packed ending to the year. There are bound to be some big winners -- and more than a few duds -- no matter what happens in the United States and abroad.

Will your favorite stock have its victory lap as we hit the home stretch, or will it get lapped? First-half performances can hold some clues, so let's look to the recent past to find out whether Seagate (NAS: STX) deserves a place in your portfolio going forward.

First-half recap
Seagate has absolutely trounced the market this year. Despite a significant drop that began in May, Seagate recovered its momentum and has posted one of the best year-to-date performances in the tech sector, as you can see here:


STX Total Return Price Chart

STX Total Return Price data by YCharts

Here's financial snapshot of its recent performance:

Market Cap$11.4 billion
TTM Revenue$13.32 billion
TTM Net Income$1.97 billion
TTM Free Cash Flow$1.48 billion
MRQ Revenue$4.45 billion
MRQ Net Income$1.15 billion
MRQ Free Cash Flow$1.32 billion
MRQ Revenue / Net Income Year-Over-Year Change65.1% / 1,132.3%
P/E and Forward P/E6.1 / 4.5
Price to Free Cash Flow7.7
Motley Fool CAPS Rating (out of 5)***

Source: Morningstar. TTM = trailing-12-month. MRQ = most recent quarterly.

What the numbers don't tell you
Let's start by taking note of that huge jump in net income over the year-ago quarter. Seagate and chief rival Western Digital (NYS: WDC) both suffered devastating flooding in their Thai manufacturing plants last year. That led to tight supplies, which turned into a profit bonanza as the companies boosted sales prices to compensate for the limited capacity. Before last quarter's sensational outperformance, Seagate's revenue and net income had both been relatively flat for years:

STX Net Income Chart

STX Net Income data by YCharts

The first quarter also represented Seagate's first steps as a much larger company, after finalizing its acquisition of Samsung's hard disk drive business late last year. The question going forward isn't whether Seagate can sustain these higher levels, but whether they represent a ceiling (thanks to inflated sales prices) or a floor.

Seagate and Western Digital seem to be set for another few months of inadequate infrastructure, as early projections anticipated constricted supplies at least until 2013. That might have been a bit too pessimistic, since the hard disk drive industry now seems to be recovering faster than expected. That led to reduced forward guidance, creating the absurd perception that a partly damaged industry is performing better than one fully intact.

Seagate hasn't suffered the same continued decline as Western Digital, which went from a highflier to a flat stock after releasing its own weak guidance. But it's still a fair bit lower than it was in January. The company's outperformance relative to Western Digital can be at least partly attributed to two major news events.

First, the company developed a storage technology capable of holding a trillion bits in every square inch of hard disk platter. That helps maintain the exponential growth in storage technology that's matched processing power's Moore's Law, and also helps the company push back against solid-state drives. Intel's (NAS: INTC) sale of its NAND flash manufacturing facilities -- that technology being a big part of SSDs -- also points to a turning of the tide. Intel might have missed out on mobile so far, but it's still a tech bellwether. If it doesn't like NAND flash, how much potential does the technology really have?

Second, superstar investor David Einhorn boosted his stake in Seagate this June, offering a major vote of confidence during a period of steep declines. Einhorn's been one of the market's most-watched money managers after his spot-on bear thesis against Green Mountain Coffee Roasters played out with perfect timing, and so far, his timing on Seagate looks similarly serendipitous.

Seagate's future looks secure, and Fool analyst Brenton Flynn recently offered three reasons why its stock remains a buy. While the PC era might be drawing to a close (or at least entering a period of flat sales), cloud computing and greater connectivity in general will both demand incredible amounts of storage. Since Seagate and Western Digital are still rebuilding, it might also be worth investigating hard disk controller manufacturer Marvell (NAS: MRVL) , which could rebound from a weak year when two of its biggest customers resume their normal buying habits.

To discover one more company that successfully straddles the PC and post-PC eras, claim your copy of The Motley Fool's free report: "The Next Trillion-Dollar Revolution." It's got all the information you need to make another great high-tech buy today. Click here to find out more, for free!.

At the time this article was published Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights.The Motley Fool owns shares of Green Mountain Coffee Roasters, Intel, and Western Digital. Motley Fool newsletter services have recommended buying shares of Green Mountain Coffee Roasters and Intel. Motley Fool newsletter services have also recommended creating a lurking gator position in Green Mountain Coffee Roasters. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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