Taking Stock of the Weakness in Seagate Technology

Note: The September Monthly Roundup will be published on Monday, October 5.

On Thursday, we completed the Portfolio’s latest reconstitution of the EPS All-Stars basket. While two days is a rather short time frame by which to judge any investment, especially one that is a basket of eight stocks, we’re pleased to say that out of the gate, the new basket is nicely ahead of the S&P 500. At the time this alert is being written, the strategy is ahead of the S&P 500 by about 200 basis points. We can thank a trifecta of stocks for powering that move, which are Lumentum (LITE), Ciena (CIEN) and SiTime (SITM).

That includes Friday’s double-digit fall in the shares of Seagate Technology (STX). Sparking that decline as well as a similar drop in the shares of Wester Digital (WDC) is a report that competitor Toshiba (TSHTY) may double the amount of hard disk drive supply it brings to the market. The story is Toshiba will invest about $380 million in the Philippines to expand facilities to create a more stable supply for components needed for AI infrastructure.

The thing is, this marks the first investment in hard disk capacity by Toshiba in about five years. Could it be part of a strategy to take share from Western Digital and Seagate, both of which have larger market shares than Toshiba? Possible.

However, in Citi’s view, Toshiba, unlike Seagate and Western Digital, does not internally source its own components, so it would need external component suppliers to also significantly raise their own capacity. Citi’s take is this could limit the impact of total exabyte supplied to the market and that makes the move lower in STX and WDC shares over done.

In Morgan Stanley’s view, while it too understands “the knee jerk reaction” in shares of Seagate, the supply/demand gap in hard disk drives through calendar year 2028 is expected to be wider than Toshiba’s potential capacity expansion. Morgan also said that Toshiba does not have leading edge capacities or heat assisted magnetic recording (HAMR). That combo has Morgan sharing that it would “gladly buy STX/WDC on this dip.” The firm has Overweight ratings on both Seagate and Western Digital.

Remember though, here at the Portfolio, STX shares are a part of the Portfolio’s All-Stars model strategy, and therefore not a fundamentally driven position for the Portfolio. Following the rules of the model, we will be holders of STX shares at least for the duration of the current quarter, and not using any weakness in the shares to scoop up more. Each position size for the model’s holdings are locked at the start of the quarter.

Again, like it or not, we’re following the model’s rules and regs.

That said, if you did not follow the Portfolio’s reconstitutions trades on Thursday or you did so only to a limited degree, the pullback in STX shares looks like an opportunity to make further progress on that front. If you get a better buy in or average cost basis price than we did, well, that’s just fine by us.

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At the time of publication, TheStreet Pro Portfolio was long CIEN, LITE, SITM and STX.