Rising Star Buy: Buying a Bigger Hard Drive

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It's been several months since I first purchased shares of hard disk drive maker Western Digital (NYS: WDC) for my Messed-Up Expectations portfolio. In that write up, I highlighted that I'd be tracking shipments, revenue growth, and inventory pretty closely.

The latter was especially important, because Wall Street worried that there had been an inventory glut of hard disks, or HDDs for short. At the time, only one-third of sell-side analysts had a buy rating on Western Digital and its competitor, Seagate Technology (NAS: STX) . SanDisk (NAS: SNDK) wasn't well liked, either.

Today, the situation is much improved. The industry experienced a 4% sequential increase in HDD shipments in the most recent quarter -- compared to a historical seasonal pattern of a 1% or 2% decline -- and that was on top of a stronger-than-expected March quarter.

The inventory situation has improved, as well.

Inventory Category






Raw materials






Work in progress






Finished goods






Revenue, full year






Source: CapitalIQ, a division of Standard & Poor's. Dollar amounts in millions.

A year ago, raw materials and work in progress had increased by more than 60%, while revenue grew by only 32%. That divergence indicated trouble for sales, since Western Digital wasn't pushing raw materials through to finished goods as quickly as before. In the meantime, finished goods didn't keep up with revenue growth, meaning the company was selling more goods than it made. The result: a glut of HDDs in customers' hands.

Over the past year, inventory growth has lined up much more with changes in revenue, indicating that the glut has largely worked itself through, and leaving Western Digital more aligned with the situation than before.

Wall Street has also changed its tune: Currently, 14 of 23 analysts have a "buy" or "outperform" recommendation on the company, while Seagate has 11 of 22 analysts making those calls.

Yet the stock price is lower today than it was at the beginning of the year. I believe that's because of macroeconomic concerns about future storage-space buying habits, rather than company-specific unease. And since I believe that there will always be something to worry about, I don't let macroeconomic fears dictate my fundamental way of investing. When the market hates stocks, that's your best time to buy them.

Tomorrow, the MUE port will expand its position in Western Digital.

After you add Western Digital to My Watchlist, come and discuss the investment on my Messed-Up Expectations discussion board, or follow me on Twitter.

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