“Contrarian Bonanza … the company just raised its revenue targets by nearly 80%. Wall Street barely noticed.”

Yet another "contrarian" pick teased by the Million-Dollar Contrarian Portfolio

By Travis Johnson, Stock Gumshoe, January 16, 2012

It’s a long list of teasers that tempts us into the Weiss fold, enticing us to subscribe to his real-money Million-Dollar Contrarian Portfolio.

Tempted to subscribe? No, not the mighty Gumshoe! Tempted to sniff out the answers for free? You bet!

The first teaser picks from this ad inspired a bit of debate (though, to be frank, more debate about past Weiss performance than about the actual picks) … so let’s see if we can identify another, shall we? The prior articles should be off to the right side of this piece, so you can click on those if you want to read them in order.

Here’s the tease:

“Investors stampeded away from this company’s stock last year when massive flooding in Thailand threatened its manufacturing plants there.

“But now, the company has recovered nicely. Plus, it has huge long-term contracts in place with the world’s largest computer makers.

“And get this: With little fanfare, the company just raised its revenue targets by nearly 80%. Wall Street barely noticed.

“Oh — and did I mention? … The company has $3.5 billion in cash!

“And if all this isn’t exciting enough, the company is a leader in a new technology that most computer experts believe will completely replace the disc drives in new computers.

“We’ll have to move quickly on this stock; the crowd is already beginning to see the error of its ways. It gapped higher in mid-December.

“But there’s still plenty of room for profits: Just to catch up to its peers, this stock would have to soar 170% from today’s levels — nearly a TRIPLE!”

This one, says the all-powerful Thinkolator, is Western Digital (WDC)

And yes, they did raise their revenue forecast –recovering much mroe quickly than they had previously said from the pain of those Thai floods that wiped out so many disk drive and semiconductor facilities. Here’s a quick piece about that forecast hike.

Hard disk drives have been called a “dying industry” for a few years now, though they still sell a hell of a lot of ’em, and it’s a rare laptop or desktop that doesn’t include an (increasingly capable and higher-tech) hard disk — flash memory is certainly the wave of the future if you ask any of the experts, but it’s still very expensive, by comparison, and hard to scale up for huge memory demands.

And of course, Western Digital and Seagate, the two main “pure play” competitors in hard drive manufacturing, are also trying to innovate to keep their business on the cutting edge — developing new memory solutions, newer, higher-tech drives, etc.

But yes, they’re certainly priced like an industry in decline — and of the two, Western Digital is certainly the more attractive if you look just at the balance sheet (STX carries a bit of debt, WDC has a huge chunk of net cash), so perhaps that’s why WDC is trading at the “pricier” 6 times next year’s earnings while STX trades at a forward PE of 4.

Will they make you rich? Well, Wall Street doesn’t think so — but with WDC trading at less than 1.5 times book value and at a truly puny forward earnings multiple you’re at least not paying a premium price for the company. If the hard drive business is in secular decline and destined to disappear, do you think it will take 20 years and give you a chance to profit nicely from one of its leaders trading at a value price? Or will hard drives be effectively gone in five years and are you just buying a declining asset that wastes away even as it generates some free cash flow as the revenues wither?

Or, I suppose, there’s Option C: is WDC a great business that can evolve through the expected decline of their lead product — it’s not necessarily easy to evolve, but it does happen on occasion … but it’s your money: your choice.

Have an urge to comment on Western Digital or the hard disk drive and memory storage industry? If so, I bet you know more than I do … so have at it, just use that friendly little comment box below.

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