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Strategies & Market Trends : Roger's 1997 Short Picks -- Ignore unavailable to you. Want to Upgrade?

To: nonzeroa who wrote (7159)	11/18/1997 6:04:00 PM
From: CalculatedRisk	Read Replies (2) \| Respond to of 9285

nonzeroa, RE: WDC (Long). I am still bearish on the general market (since early July) and this bothers me! I prefer being one of the few bulls (like in late '94), but anyway ... The DD sector has been brutalized. Much of this selling is justifiable, but from a value perspective, I think there are now some opportunities. I have started "nibbling" with WDC. It feels good going long, although I may be a little early. With the DD companies, I have a bias towards WDC. First, their business model (outsourcing vs. vertical integration) is IMO better suited to withstand downturns and recover quicker. Second, a personal friend is one of the top executives. Although we NEVER discuss the prospects for WDC (I don't want to know any insider information), I have absolute confidence in this individual! WDC lets others make the technological leaps, and then they move quickly and (hopefully) profitably. Their competitive advantage is quickness and adaptability. Is "quickness" a sustainable competitive advantage? Maybe - but only as long as the management team stays together and focused. And I can guarantee they are focused! I must admit, that in general, I don't like this business. DDs have very thin margins (15% gross) and are susceptible to complete obsolescence! Right now there are numerous real problems facing WDC: Price wars, Fujitsu dumping drives, questions about the $1000 PCs, OEMs moving to BTO (inventory reduction), WD late moving to MR, IBM introducing new DDs, Asian problems, severe earnings warnings ($0.25 down from $0.85), etc. And now we are getting the avalanche of analysts downgrades: Robertson Stephens, Needham and today Lehman & Deutsche Morgan. But when you break these problems down, things are not that bad. 1) Price Wars, Fujitsu Dumping. Historically, the DD price wars have lasted 3 to 6 months. 2) $1000 PC. This is actually an opportunity. I see component based PCs coming out next year using "firewire" or "fiber channel". WDC will introduce DDs for this market early next year (a guess). 3) OEMs moving to BTO (build to order): This is a one time event - and in the long run a positive. 4) WD late to MR: Not a problem. 5) IBM introducing new DDs: IBM is WDC #1 competitor. This is potentially significant. (For IBM, DD is minor) 6) Asian problems: For WDC, this is not a serious problem. They manufacture in Asia and their costs should decrease. 7) Earnings Warnings: IMO, a 1 to 2 quarter problem. The good news is WDC should stay profitable (not counting one time charges). 8) Analysts Downgrades: They recommend buying at $50 and selling at $23. Savvy investors <G>! Is it a bargain at $22? Or will there be more bad news? SEG just warned minutes ago! Maybe it would be prudent to wait a few months, but I think the risk/reward is favorable. Regards, Bill P.S. Sometimes I diversify across an industry (during the Hilary HealthScare I bought several pharmaceutical companies - MRK, AHP, etc.), other times I just buy the company that I think is the best - in this case WDC.