Here’s Why Jim Chanos Beat Up Data Storage Stocks

Seagate Technology (NASDAQ:STX) is apparently the hot stock to short right now. Shares were off as much as 4.8 percent in afternoon trading on Thursday, retreating from a fresh 52-week high set just a few days ago. The stock is up more than 38 percent year over year, 32 percent year to date, and 14 percent in the past month.

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Shares leveled out around $40.30 following comments by infamous short seller Jim Chanos made at this year’s Sohn Investment Conference. Chanos reportedly said that the company and the industry in which it operates — hard disk manufacturing / data-storage devices — is in trouble. According to the president and founder of Kynikos Associates, the decline in demand for personal computers will outweigh an increase in demand for cloud-based storage services.

But Chanos isn’t the only person bearish on the stock or the industry. Analysts maintain a mean Hold recommendation on the stock at an average price target of $38.72, about 4 percent below its trading price on Thursday afternoon. By all accounts the stock was due for some profit-taking in light of its 14.5 percent run in May alone. As of April 15, before Chanos had a chance to weigh in, 8.4 percent of the stock’s float was already short.

Western Digital Corp (NYSE:WDC) was down as much as 2.6 percent in afternoon trading on Thursday, and the decline was also attributed to Chanos. Western Digital is another data-storage device company rebounding off fresh 52-week highs, so it’s unsurprising that some investors would be keen on taking profits. As of April 15, 2.8 percent of the stock’s float was already short.

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Data complied by Thomson-Reuters shows that since mid-October, seven analysts have downgraded Seagate Technology, and five have downgraded Western Digital Corp. At a glance, given the strong performance of the companies over the past year (more than that, really — they have both outperformed the S&P 500 over the past two-year and five-year period).

Seagate Technology. Stock Chart - STX Interactive Chart - Yahoo! Finance

Chanos suggested that besides a decline in demand for data-storage devices, a number of sales and option exercises of company executives raised red flags at Seagate. While it’s not unusual for insiders, or anyone else, to take profits at fresh highs, the number of inside sales is interesting.

Position Date Transaction Number of Shares
EVP, Sales/Marketing Officer May 7 Sale 41,500
Director May 6 Option Exercise 19,374
Executive Vice President, Sales May 6 Option Exercise 18,750
Executive Vice President, Sales May 6 Sale 19,303
Director May 6 Sale 16,041
Director May 6 Sale 19,374
Director May 2 Sale 7,709
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Unlike Western Digital and Seagate, EMC Corp. (NYSE:EMC) is a data-storage stock that is not currently trading near 52-week highs. Shares are off more than 14 percent year over year and are down 5.6 percent this year to date. Just 2.5 percent of the stock’s float was short as of April 15, but analysts are actually more bullish on this company than some of its competitors.

The mean analyst price target of $29.04 suggests about 25 percent upside as of Thursday afternoon. Most analysts maintain a Buy rating on the stock.

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