SanDisk May Be Flash in the Pan

03/27/2007 12:00 am EST

Focus:

Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Ticker symbol SNDK  

Bernie Schaeffer, chairman and CEO of Schaeffer’s Investment Research, suggests that the bullishness about flash memory company SanDisk may be overdone, leaving downside risk.  

A recent article in Businessweek.com looks at a deal between SanDisk (NASDAQ: SNDK) and Hynix Semiconductor. The two companies are going to join forces on production of powerful computer chips for flash memory, which stores digital data in devices like cameras or music players. 

This move was made by the two companies to position themselves against future rivals in the fiercely competitive flash memory industry. Originally, Hynix had set the deal with M-Systems, an Israeli based computer storage-device maker.  

Standard & Poor's analyst Jay Hingorani stated in a research notes that: "Terms are confidential, but we think SNDK benefits from strong manufacturing abilities of Korea's Hynix." Hingorani continued: "We see this deal, like the one with Toshiba, augmenting SNDK's non-captive supply of components." The Toshiba deal is a joint venture with SNDK to produce computer chips. It has helped SNDK keep its costs down with advanced technology with more efficient production.  

This article, however, drips of optimism toward SNDK. Of course, the staunchest of SNDK bears has to admit that the equity has enjoyed some recent strength thanks to a brokerage upgrade. While the short-term rally is nice, I must point out potential resistance at SNDK's ten-month moving average.  

Not only has the stock not finished above this trend line since August, but italso has bearishly crossed its 20-month counterpart. This technical formation is often the precursor to a continued downtrend. In addition, SNDK faces resistance at the 46 level--that is, if it can break through the 44 and 45 levels.  

The last time the stock finished a week above the 45 level was the end of November, and it looks as if the more than 44,000 call contracts at this strike price could provide too much options-related resistance for the stock.  

Although the stock has dropped consistently throughout the past year (it closed just shy of $45 Monday), optimism rules the roost in the options pits. SNDK's Schaeffer's put/call open interest ratio (SOIR) of 0.54 is lower than 85 percent of the past year's worth of readings. This optimism is puzzling, as is the fact that eight analysts rate the stock a "Buy" or better. Remember, optimism toward a poor performer is the hallmark of a bearish contrarians play.

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