The value investing community is a loyal one. And when one of their revered members makes a big purchase, the whole group dials in. David Einhorn recently disclosed an 8.6 million bump in his Greenlight Capital fund's Seagate (NAS: STX) position. The stock has looked cheap for a while, but is there substantial upside to this deep discount?

Drivin' south, but lookin' north
Up until the Einhorn news came out, Seagate's stock had been on the ropes. The Thai floods of 2011 brought hard drive manufacturing to a halt, and it's been a tough recovery for Seagate and competitor Western Digital (NAS: WDC) . Demand built up for the first quarter of 2012 as both companies hustled to get production levels back to normal. But after the initial rush, demand seemed to be slowing substantially. Analysts and pundits weighed in, citing the move to solid state drives and mobile devices as a major obstacle for the hard drive manufacturers.

It's true that the need for physical storage on consumer devices will slow. But even the cloud needs a place to call home, and that's where these companies can pick up the slack. Seagate CEO Steve Luzco has said before that his company is in position to provide the infrastructure to the massively growing cloud industry. Throw in the fact that Samsung hard and hybrid drives now belong to Seagate, and the future looks pretty bright for a priced-for-death company.


How low can you go?
Seagate and Western Digital both trade at incredibly low valuations. Neither company trades for more than 3 times forward earnings. It looks like an obvious value opportunity, based on that metric alone, but does the market see something that Einhorn does not? The question isn't, "Is Seagate cheap?" We know it's cheap. The question is, "Where can it go from here?"

I believe Seagate can appreciate in value, but it's hard for me to determine where that value will come from. The company has been enjoying incredible gross and net margins, due to the demand for its drives after the flooding in Thailand, but that pricing power should eventually erode. The future of Seagate is determined by its power to innovate and stay relevant in the tech game. Unfortunately, Excel doesn't have a formula for that.

Why you no like me?
What may explain Seagate's super-low valuation is that value investors just don't like this business. Seagate and Western Digital are in a rapidly transforming technology business. That doesn't sound like a wide-moat business to me. Remember, a stock with little downside is only half the battle, there needs to be a path going up as well.

David Einhorn is a deep-value investor extraordinaire, and I have absolutely zero doubt that the thesis behind his investment is sound. But I, like many a value person, am lazy. Give me a simple business that I can model out a few years without having to call futurist Ray Kurzweil to ask him what the future holds for humanity.

I know I sound like a defeatist when I cast off an entire sector as uninvestable, but I know my limitations. There are some analysts here at the Fool who know their tech like I know my vodka. Check out their special free report "The Next Trillion Dollar Revolution" to see what I mean. These guys know of a company with a hidden smartphone component that they are confident will shake things up big time. Click here to claim your free copy today before it's gone!

At the time this article was published At the time of this article, Fool contributor Michael Lewis owned none of the stocks mentioned. The Motley Fool owns shares of Western Digital. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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Serenity Stocks

Ben Graham was Warren Buffett's professor and mentor.
Buffett calls Graham his second greatest influence after his own father, and even named his son after Graham.

The Benjamin Graham stock screener (http://www.anahin.net/screener) gives a complete Graham analysis, for all 4000 stocks listed on the NYSE and NASDAQ.
Including all the above stocks.

June 14 2012 at 12:37 AM Report abuse rate up rate down Reply
Jonathan Lerche

He must have quite a thesis. Based on the below metrics (ripped off from 'the perfect stock' series) I'm not buying just yet.

5 year revenue growth .98%
1 year revenue growth -3.7%
5 year dividend growth 0%
Gross Margin 33.9%
Net Martin 15%
Debt to Equity 78%
Current Ratio 2
Return on Equity 53.6%
Normalized P/E UNK
Current Yield 4.3%
Payout Ratio 18%

June 13 2012 at 6:00 PM Report abuse rate up rate down Reply