Ahead of a potential monster week for the market, with plenty of volatility, last week was fairly quiet for the indexes. The S&P 500 gained 0.7%, and the Dow and Nasdaq were mostly unchanged.
This week, on the other hand, could be a bit more dicey with a Fed meeting, the January Jobs Report and many market-leading companies reporting earnings.
The Stock – Western Digital (WDC)
Why the Strength
After suffering through a post-pandemic contraction, industry experts believe the storage sector is on the cusp of a multi-year boom due to (you guessed it) AI-related enterprise storage growth, led by data centers.
Western Digital is a top provider of hard disk drives (HDD), NAND flash memory and other data storage devices and solutions to customers worldwide. Analysts expect the company’s HDD products to benefit from the exponential expansion in cloud storage and artificial intelligence demands, both of which rely heavily on HDDs. While the company’s overall HDD shipments and sales have declined in recent quarters, the downtrend seems to be at an end while the nearline (on-site storage) data center HDD market is expanding.
Those positive expectations drove the stock’s latest surge higher as a major institutional bank just named Western Digital as its top sector pick, also bumping up its target price by 40% based on the higher NAND prices the firm is seeing. Also last week, Western Digital released financial results for fiscal Q2 (ended December 29) that saw revenue of $3 billion decline 2% year-on-year (due to lower e-solid state drive bit shipments), but that was a big improvement over recent declines, and a per-share loss of 69 cents exceeded expectations by 41 cents.
Moreover, revenue rose 10% from the prior quarter, with cloud sales increasing 23% sequentially—the first return to growth in this segment in six quarters—thanks to an increase in nearline shipments. In the firm’s consumer segment, sequential revenue growth was led by seasonal strength in flash volume shipments and selling prices.
For fiscal Q3, management guided for revenue to increase 18% at the midpoint (up 7% sequentially) and sees nearline HDD demand continuing to improve going forward. Wall Street sees earnings in the black in the June quarter and kiting higher from there. It’s an interesting turnaround situation.
Technical Analysis
WDC ended the 2022 bear market at 30 and popped higher initially, but effectively spent the next several months building a bottom—indeed, while there was some decent upside in the summer and fall, the stock’s late-October shakeout wiped away most of that. But WDC changed character after that shakeout, not only rising, but doing so for many weeks on eye-opening volume, including last week’s move, which came on the biggest weekly volume in 14 years! Stop — 51
The Covered Call Trade
Buy Western Digital (WDC) Stock at 60, Sell to Open March 60 Strike Calls (exp. 3/15) for $2.70, or a Net Price of 57.3 or less
Static Return: $270 per covered call (4.71%)
Breakeven: 57.3
Covered Call Return (if assigned): $270 per covered call (4.71%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 57.3 or less. (In this case 60 minus 2.70 = 57.3. Or another example is you could pay 59.30 for the stock and sell the call for 2, which also equals 57.3)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
The next Cabot Profit Booster issue will be published on February 6, 2024.
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