The Secret of Money-Doublers They Don’t Want You to Know
#6 STEC Inc. (STEC) Calls
By Nick Atkeson and Andrew Houghton
STEC Inc. (STEC) has vastly superior memory and data storage technology, and the company
is taking market share at an incredible pace. The stock was a high-flyer this year, climbing to $42.50, but now trades for less than $17.
STEC was crushed primarily because of an overly aggressive order placed by EMC (EMC) If
EMC has excess STEC inventory going into the first quarter of 2010, STEC’s Q1 earnings could be hit hard, as EMC represents 60% of STEC’s sales. Also, Oracle (ORCL) is acquiring Sun Microsystems (JAVA), so customers aren’t buying Sun storage devices with STEC drives for fear that Oracle will discontinue them. Finally, investors were angered when management
sold much of their stock at about $31 per share on a recent follow-on offering just before telling investors about the EMC problem.
However, we like the stock. The company is generating about 70 cents of cash flow per share per quarter. And our guys in Silicon Valley tell us that EMC is not known for holding
onto excess inventory and will try to move it aggressively. STEC will face increasing competition and margin pressure in 2010, but it is currently
running at 60% operating margins, so there is plenty of room for margin pressure while maintaining outsized earnings.
STEC has a hot product in a hot market, not to mention that IBM (IBM) and Hewlett-Packard
(HPQ) are new customers. We believe 2010 will be a great year for the stock after the Q1
revenue uncertainty overhang is cleared. The stock has run up recently, but if it returns to its 52-week high, it will have appreciated about 150% from current levels. And just imagine
the astronomical profits you can make if you buy STEC call options and this happens.
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