Beware of 'cheap' tech stocks

Disk-drive makers look cheap, but there are better investment opportunities in technology.

By Jim Cramer Mar 4, 2010 8:41AM
Jim Cramer

By Jim Cramer, TheStreet

 

Is tech as cheap as I think it is? Yesterday the disk drive world was rocked by still one more whisper that there's been double ordering and that prices are going to come down hard. Seagate (STX) plunged a point as soon as the rumors hit the tape.

 

So how risky is Seagate, then? Here's a stock that just hit its 52-week-high. At 6 times earnings, how much danger is there?

 

Let's assess.

First, we know the institutions were recently bailing out from the stock. We know that because of the excellent work that Ken Shreve, the writer of the Market Movers newsletter, who noticed from his great chart-reading that Seagate's big investors had a jailbreak not that long ago, at about $1 below where the stock is trading now.

 

I think they are worried because when earnings have crashed before in the disk drive business, they've crashed big-time. Sometimes stocks in this group that look like they are dirt-cheap turn out to be very expensive. A 6-times-earnings stock might turn out to be 10, 12, 15 times earnings in a heartbeat. Sometimes these companies swing to outright losses.

 

Bing: More on Seagate

 

But it takes two to tango for that to happen: too much supply and too little demand. The real crashes have been when demand fell off a cliff, not just when new factories started pumping out drives.

 

Right now we have the latter starting to happen. The companies are increasing their capex budgets. But I do not see the weakness on the demand side. Not even seasonally. Sure, it isn't as strong as it is in the fall; never is.

 

So if you take the demand-side issues off the table and just consider that there might be more supply, I think you get a situation where a stock is cheap and the P/E is low. However, this is tech. That's not enough of a reason to buy. Nor to sell.

 

It's just a reason to do nothing, which is what I want to do not only with Seagate but Western Digital (WDC). There are too many other parts of the tech food chain, like Intel (INTC) or Cypress (CY) or Xilinx (XLNX) that I like far more with much more upside.

 

At the time of publication, Cramer was long Intel.

 

Jim Cramer is co-founder and chairman of TheStreet. He contributes daily market commentary for TheStreet's sites and serves as an adviser to the company's CEO.

 

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