Is Sandisk (NASDAQ: SNDK) stock overbought... and overpriced? Both these worries appear to be dogging Sandisk investors Tuesday morning, as shares of the computer flash memory maker fall 8.1% through 10:50 a.m. What investors may not realize, however, is that the news isn't quite as bad as it sounds.
This Rare Signal Is Flashing Again. In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia.
Continue » Today's news comes from investment banker Morgan Stanley, by way of StreetInsider.com, which has the scoop. In a note out this morning, MS compared the institutional ownership versus representation in the S&P 500 among large semiconductor names. What it found is that several stocks are "under-owned," with institutions owning about 2.5% less Nvidia (NASDAQ: NVDA) stock than the stock's weighting in the S&P 500 index.
MS notes that Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), and Amazon.com (NASDAQ: AMZN) are all similarly "under-owned." In contrast, Sandisk stock is "over-owned," with large investors owning about 2.3% more Sandisk stock in their portfolios than is found in the S&P 500. But here's the thing: This is not bad news. Do institutions own too much Sandisk stock?
It all depends on why they own more Sandisk stock than the S&P does. And if you ask me, the answer to this question is because Sandisk stock is cheap! Consider: Even after its recent bounce-back, Sandisk shares cost only about 22 times earnings.
And tremendous recent improvement in free cash flow means Sandisk stock also costs only about 22x FCF. At the same time, most analysts who follow Sandisk stock agree the company's growth spurt is just getting started, and Sandisk profits could soar 40% annually over the next five years. Sandisk stock is a bargain right now.
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