Bulls Battle Bears in Storage Stock

02/18/2009 10:39 am EST

Focus: STOCKS

Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

Joseph Hargett of Schaeffer's Investment Research says there's a tug of war between bulls and bears that will determine which way a storage provider's stock moves.

According to a Barron's article by Mark Veverka ("NetApp's Cheap Price Attracts All Kinds of Buyers," February 9th), NetApp's (Nasdaq: NTAP) chief executive officer Dan Warmenhoven doesn't believe that demand for his company's products is disappearing just because the economy is in a recession.

"Just because companies are struggling, don't think that they don't need more storage infrastructure," Warmenhoven stated. But, while data storage isn't recession proof, many of the analysts cited in this article believe that NTAP is poised to outpace the industry.

Specifically, Sushil Wagle [of] Seligman Technology Group thinks storage sales can stay positive and might post growth in the mid-single digits. What's more, the article states that NetApp's competitive advantage and potential growth rate aren't reflected in its $16 share price. Currently, NTAP sports a price-to-earnings ratio of 12.7x, well below its chief competitor EMC's (NYSE: EMC) 14x multiple.

Furthermore, some analysts believe that NTAP is ripe for a takeover. Paul Wick, who runs the Seligman Communications & Information Fund, thinks that the company could fetch as much as $30 per share in a buyout bid. Potential suitors, according to Barron's, might include IBM (NYSE: IBM), Hewlett-Packard (NYSE: HPQ), Dell (Nasdaq: DELL), Oracle (Nasdaq; ORCL), and Cisco Systems (Nasdaq: CSCO).

[Ahead of] the company's earnings report [last] week, this bullish piece from the financial media could be a sign of elevated expectations. However, most investors remain heavily entrenched in their bearish positions heading into the event.

What's more, while the analysts cited in the Barron's article are heavily bullish toward NTAP, they are a minority on Wall Street. According to Zacks Investment Research, 12 of the 22 brokerage firms following the shares rate them a Hold or worse, leaving the door open for potential upgrades.

Technically speaking, NTAP's price action does not reflect the pessimistic attitudes of the investing public. The stock has bested the Standard & Poor's 500 index by 43% on a relative-strength basis during the past 60 trading days. What's more, the shares rallied more than 15% in 2009, compared to the S&P's loss of [around 4%].

The stock is currently trending higher along support at its ten- and 20-day moving averages, and looks poised to challenge potential resistance in the $16.50 to $17 region. A breakout above this technical sticking point could prompt an unwinding of bearish investor sentiment, thus providing fuel for NTAP to continue its budding rally.

(Last week, NetApp reported lower-than-expected third-quarter earnings, and the shares sold off big, then rallied over 5% last Thursday after the company announced a restructuring plan. It closed Tuesday below $16-Editor.)

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