Out of WDC (almost)

I’m basically out, I just kept a 100 shares and 2 calls short. I think the stock is correctly valued, not anymore as cheap as when I bought. This was my biggest holding and did not feel comfortable having such a big unrealized profit considering that I think that the industry has no pricing power (even with only three players) plus I find myself too much in the dark to evaluate if the Hitachi acquisition was good, I do not feel comfortable having always heard until very recently that the Asian hard disk makers were unprofitable, it’s not because Hitachi got a couple of profitable years that it justifies the price wdc paid to buy it. But what bothers me more is the lack of information to see how Hitachi’s disk drive unit performed, and I hate putting my money where I cannot value the business. A third reason that worries me a bit (but much less than how it sounds on the news though) is the threat of SSD. It is true that they are 10 times cheaper than hard disks but it is still cheap for the average Joe to buy a 100 GB ssd disk, and the performance boost is amazing, and I do not under estimate the customers seek for performance. So I am worried that if tablets get massified, or notebooks/netbooks with faster SSD drive start to take share, then WDC will gradually sell less HHDs used on notebooks (which is a big source of income for them), actually you can already see the HDD notebook sales trending down. And wdc margins are very sensible to sales, so I do not want to see their HDD consumer sales a bit reduced !

As Warren Bufett says:

Do not hold a stock for 10 minutes if you do not clearly see how their business will look like in 10 years

I personally do not even see how the industry will look like in 5 years. So I sold. I still think hard drives will surely be used extensively on the cloud and enterprise in the long run (not sure at about this regarding consumers). But WDC is not yet strong enough in that segment, not even with Hitachi’s enterprise segment included.

Here are some additional thoughts copied from an email I wrote to another investor on the reasons why I sold:

It is a great company still but I think you already clearly know the reasons I sold. They always say that margins are at historical lows, but I have my doubts. The usual way that margins go up is when selling prices go up and costs remain the same or when prices stay or go down but costs go down much more. But I have never seen prices go up, specially now with so many other alternatives such as ipads/tablets that would be suicidal. So the practical reason left for margins go up is if costs go down more than ASP’s, but that is getting every time more difficult as it costs each time more to implement a technology to reduce the areal density, it’s almost reaching its physical limits and to reduce it much more will demand an enormous capital investment, that’s why they are even considering a research and development alliance between stx and wdc and a third one (I’m not sure of the name of the third party anymore).

When I bought there was no Hitachi on the way, pricing was stronger and the ssd/tablets/smartphones were almost meaningless. Those facts have now changed, I really don’t see the future clear anymore (see http://investing.kuchita.com/2011/04/21/philip-a-fisher-wisdom/ for general reasons on when to sell). I love the business and acknowledge that storage has no where to go but up. But the business case is another thing, the car industry has also grown exponentially but their businesses have been lowsy on the long term. And as long as they keep on cutting and cutting costs and as long as there are 2 players in the HDD game it will be a fight for lower prices because there are too many incentives to find new technology that lowers the costs. It’s just a business that moves too fast for my taste and for my future view to feel at ease. I don’t feel comfortable having more than 30% of my eggs in it.

Anyways I am happy, I realized more than 20K (see below for the transactions made). WDC is still a great company, but I think it’s risk reward does not justify holding it as my biggest investment anymore.

Cheers !
jrv

Profit disclosure:

Realized:

2009: 374.73

2010: 2011.61 – 637.03 + 457 (venta a 28.52 de 100 acciones compradas a 23.94) + 711 (venta a 32.6 de 100 acciones compradas a 25.48) + 132.52 (cubrir a 326.46 put strike 35 jan 2011 vendido a 458.99) + 86.5 (venta a 34.23 de 10 acciones compradas a 25.48) + 207.22 (cubrir a 271.01 put strike 35 jan 2011 vendido a 478.24)

2011: 268.24 (venta de 25 a 36.25 compradas a 25.480316) + 195.6 (venta a 35.31 de 20 acciones compradas a 25.48) + 292.98 (cubrir a 311.01 put jan 2012 vendido a 603.986) + 202 (venta a 35.63 de 20 acciones compradas a 25.48) + 26.61 (close short apr 2011 strike 40 call) + 55.29 (close short apr 2011 strike 40 call) + 44.62 (apr 2011 30 put [email protected] sold @164.31) + 72.62 (apr 2011 31 put [email protected] sold @200.31) + 40.98 (FEB 2011 36 call [email protected] bought@24) + 72.3 (mar 2025.41693511 37 call [email protected] bought@51) + 382.59 (35 shares sold @36.44 bought @25.480316) + 175.39 (15 shares sold @37.24 bought @25.480316) + 299.74 (25 shares sold @37.51 bought @25.480316) + 247.39 (20 shares sold @37.9 bought @25.480316) + 499.79 (40 shares sold @38 bought @25.480316) + 1425.97 (100 shares sold @39.75 bought @25.480316) + 1427.97 (100 shares sold @39.76 bought @25.480316) + 30.97 (apr 2011 37 call sold@118 bought@85) + 99.27 (may 2011 41 call sold@179 bought@78) + 102.27 (may 2011 40 call sold@209 bought@105) + 1322.97 (100 shares sold @38.72 bought @ 25.480316) + 349.9921 (25 shares sold @ 39.52 bought @ 25.480316) + 1112.2263 (25 shares sold @ 40.31 bought @ 25.480316) + 4252.10836 (290 shares sold @ 40.16 bought @ 25.480316) + 809.3165 (100 shares sold @ 40.15 bought @ 33.51007) + 155.73065 (10 shares sold @40.16 bought @24.586935) + 1419.12585 (90 shares sold @40.36 bought @24.586935) + 174 (100 shares sold @40.36 bought @38.61) + 684.993 (100 shares sold @40.36 bought @33.51007)

Tot realized: 19444.27466
*************

Unrealized: 1402.29 (100 stocks @41.34 bought @25.416935) – 160.01 (strike 40 july call sold) -30.01 (strike 42 may call sold))
*************

Total realized+unrealized = 20846.56466

About jrv

I was born in Spain and lived in Belgium, Chile, France, USA, Argentina among other places. Currently I am trying to settle down in a wild place. I am "retired", even though now I dedicate more hours "working" for my investments than I ever worked in the real labor market where I used to work in IT and Banking. I am a family man, I have a lovely wife, several sons and one step daughter. I have humble tastes, I like to stay home and read about companies and investments. I started investing at 25 before the internet bubble exploded. I did not know much about investing and liked technical analysis so my results were pretty bad. Fortunately I did not have much to lose. Some years later in 2006 bored of doing only real state investments and with quite a lot of money saved I opened an account in a cheap and excellent online broker and started again. This time I did not want to commit the same mistake, so I decided to follow a model. I heard that Warren Buffett was the best at making money via stocks so I started by reading a lot about him, all of his shareholders letters and several of the books that he recommended. I learned a lot, started applying his investing principles and reading a lot of 10K's. Digested news from lots of different sources. Basically I started buying very good and cheap companies and holding them for ever if possible and if nothing changed fundamentally. When the housing crisis started I was more than 75% cash. At that time I identified good companies at incredibly cheap prices so I invested most of my savings in stocks. In less than I year I doubled. By the second semester of 2009 I turned my software company into an investment vehicle and dedicated myself full time to it. My wife and I decided to change our lifestyle and moved from Belgium to the beach in a wild country. The goal was to keep fixed costs low in order to be able to live with a minimum 6-8% yearly return but specially to move away from the inhuman life of civilization and to have finally some peace and sunny weather to concentrate better on investing. Now I can think and study about companies 60 hours a week and I am doing great. I can finally do what I want full time and can proudly say that I have never been so happy, specially also with my just born 4th son, my other great kids and my sweet wife who supports me fully while I study most of the day and patiently wait for the opportunity to make a swing ! You can learn a bit more about my portfolio by viewing it at www.kuchita.com/view/sumo.php or you may learn more about me and my family by following the link "Author's site" from the menu above.
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3 Responses to Out of WDC (almost)

  1. jrv says:

    I also just sold one of the two calls I had left for a 2 dolar profit. Now I do not run the risk anymore that WDC will close over 43 on the 20th may (which would have made me lose money since I had 2 calls but only 100 stocks to cover them). I just have left 100 stocks and 1 call short fully covered by the 100 stocks so the only risk I run now is on the downside (not the upside anymore) if wdc goes under 40 by mid july, but given the supply constraints by HDD suppliers due to the earthquake in Japan chances are low, so I have quite some good chances to fully exit the remaining WDC position at a nice profit:

    unrealized profit: 592.983 (100 stocks @40.65 bought @33.51007 – 121.01 (strike 40 july call sold))

  2. jrv says:

    I just sold the second call, the one I was covered with 100 shares, july strike 40 call, for a 35 dollar profit. I now have only 100 shares left and the price starts to less expensive again, who know, maybe I jump in again if it goes down to 30.

    Profit disclosure:

    Tot realized: 20290.54116
    *************
    Unrealized: 408.993 (100 stocks @37.60 bought @33.51007)
    *************
    Total realized+unrealized = 20699.533

  3. jrv says:

    This post was erased from the WDC yahoo message board, I prefer to think it was due to a program flaw than because of something terrible I mentioned:

    I personally don’t care if its 10 times more expensive, because an 80 GB is still quite cheap and for 90% of the people its a lot of space, they can always buy an external drive if they have 1000 movies to store, and I wonder how many do have so much information, I guess a small percentage.

    Have you ever try a good ssd ? It gives an amazing performance boost its like having infinite ram memory. And if a guy like me who is invested in WDC loves the performance boost of an SSD imagine the average Joe who does not even know what an ssd or hhd is. I acknowledge its more expensive and has read write problems but so what, its still cheap and the read write problems on practical terms are maybe as much of a problem as having a motor or a hdd on a notebook and dropping it, the moving parts of the hdd can break but not in the ssd.

    And even then it does not commercially matter so much I think, ask 20 persons on the street what they look for when they buy a computer, they will say they want a good one, they have no idea about technical specs or the hhd/ssd discussion, they just want something good, that means fast, long battery life, trendy. SSD are starting o be cheap enough and good enough for that its not getting worse.

    Do not underestimate how much performance is valued by the average Joe.

    That’s why apple an dell are offering them in their best models, and when the best models become the mainstream models it will be a problem for traditional notebooks with HHDs. Actually the sales trend of notebook hdds is already down even considering that the whole market is up.

    The question now is what percentage of profits does WDC get from notebook hdds?

    Do not think I am negative, I am a WDC holder I just want to be very critical with it because I want no risk, by that I mean I do not want to lose money so I want to have very very clear what the threats are.

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