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.
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] [email protected]) + 72.3 (mar 2025.41693511 37 call [email protected] [email protected]) + 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 [email protected] [email protected]) + 99.27 (may 2011 41 call [email protected] [email protected]) + 102.27 (may 2011 40 call [email protected] [email protected]) + 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