As a value investor, volatility is your friend. It can offer you great opportunities to buy when prices are low and equally great opportunities to sell when they are high. For whatever reason, some value stocks are more volatile than others. For example, LCA-Vision (LCAV) is a stock that has offered investors plenty of entry and exit points over the last two years. Another volatile stock with value potential appears to be Seagate Technology (STX).
Seagate designs and manufactures hard disk drives. These devices are currently incorporated into pretty much all servers, desktops, and laptops. Seagate's market share is about 30%, as it sold nearly 50 million hard drives last quarter. The company is pretty much debt free (it has almost as much cash as it has debt), and only once over the last business cycle has its annual operating margin fallen below 5.5%.
Despite the apparent stability of the business however, Seagate's stock price fluctuates wildly. In just the last two years, Seagate's stock price has gone from $23 to $3, back up to $21 and back down to $10. How can a company with low debt levels and a history of consistent profits lose 80% of its value and gain 600% of its value when its business hasn't really changed much?
It appears that the market is overly fixated on short-term outlooks in this particular industry. Only a few months ago, we saw how analysts were intensely focused on the short-term outlook for one of Seagate's competitors, Western Digital.
There are a couple of risks in this industry of which value investors should take note. Operating in a field where technological change can render companies obsolete over the course of just a few years, Seagate's future viability is somewhat uncertain. There are other devices with the potential to usurp the capabilities of hard disk drives, but currently such devices are too costly to take over the market. That could change.
Furthermore, the hard drive industry is somewhat "commoditized". If a competitor expands too quickly, prices for all disk drives fall. This means that to a large extent, Seagate does not control its own destiny. It also means that management must be on the ball, as the company must be a low cost operator to be successful.
Seagate reports its earnings tomorrow afternoon. If it disappoints in some way, a volatile stock such as this one could fall dramatically. Investors who are well-prepared beforehand could benefit in such a situation, as we saw with Kirkland's after its latest quarterly report.