NEW BEARISH Plays

Western Digital Corp. - WDC - close: 59.40 change: -1.56

Stop Loss: 62.35
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on December -- at $---.--
Listed on December 17, 2015
Time Frame: Exit PRIOR to earnings in late January
Average Daily Volume = 3.5 million
New Positions: Yes, see below

Company Description

Trade Description:
Increased competition has turned hard drives into a commodity business. Prices for drives are falling. WDC is trying to move into higher-margin business with its acquisition of SanDisk (SNDK) but the action in the stock suggest Wall Street is concerned.

WDC is in the technology sector. According to the company, "Founded in 1970, Western Digital Corp., Irvine, Calif., is an industry-leading developer and manufacturer of storage solutions that enable people to create, manage, experience and preserve digital content. It is a long-time innovator in the storage industry. Western Digital Corporation is responding to changing market needs by providing a full portfolio of compelling, high-quality storage products with effective technology deployment, high efficiency, flexibility and speed. Its products are marketed under the HGST and WD brands to OEMs, distributors, resellers, cloud infrastructure providers and consumers."

WDC, and its rivals, face an industry wide challenge. Consumer demand for personal computers (PCs) has been slowing down for years. PCs were replaced by laptops. Now laptop demand is in jeopardy because they are being replaced by tablet PCs. At the same time growth in technology and disk drive creation has generated the ability to produce huge disk drives with massive amounts of storage. That means consumers and businesses need to buy fewer drives for the storage they need.

Another issue has been the trend in solid state drives (SSD). Buyers prefer SSD drives because normally they are faster, thinner, and use less power than traditional spinning hard drives. Selling hard drives to PC and laptop makers is the majority of WDC's business (more than 40%). WDC recently announced plans to buy SanDisk (SNDK) who has a strong SSD business. That makes sense because demand for SSDs are replacing demand for normal hard drives. One problem is just like all computer hardware, it becomes cheaper to make as technology improves. The price of SSD drives has fallen sharply and the spread between SSD and normal hard drives will continue to narrow.

WDC's deal to buy SNDK is valued around $19 billion. The company is planning to borrow $17-to-$18 billion for the deal. The surge in debt has some analysts concerned about WDC. Another potential challenge is that WDC is also in the process of a deal with Unisplendour, which is a China-based company trying to make a $3.8 billion investment into WDC. At the time this Unisplendor investment was valued at $92.50 per share (for about 15% of WDC). You may have noticed that shares of WDC are now trading near $60.

WDC announced the SNDK deal on October 21st. Shares declined on the news. Actually shares of WDC were already in decline on speculation they might buy SNDK (for the record, the NASDAQ was in rally mode). There are concerns that WDC may have paid too much for SNDK.

Shares of WDC have been trying to find support in the $60-65 zone for the last few weeks. Now it looks like WDC is breaking down from this trading range and the next support level could be $50.00. Shares underperformed the market today with a -2.5% decline. Any further weakness could be an entry point for bearish trades. The point & figure chart is bearish and forecasting at $36.00 target. Monday's intraday low (Dec. 14th) was $59.06. Tonight we are suggesting a trigger to launch bearish positions at $58.85.

Trigger @ $58.85

- Suggested Positions -

Short WDC stock @ $58.85

- (or for more adventurous traders, try this option) -

Buy the FEB $55 PUT (WDC160219P55) current ask $2.45
option price is a current quote and not a suggested entry price.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

Option Format: symbol-year-month-day-call-strike

Daily Chart:

Weekly Chart: