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Jonathan Moreland

Inside the Markets: More to ScanDisk Than Flash Memory

Saavy insider signals value.

November 12, 2007
by Jonathan Moreland

DISCLOSURE: Readers should assume that all stocks mentioned in this column are owned by the author and/or his firm unless otherwise noted.

As some CPA Insider™ readers may know, the price action in shares of ScanDisk (NASDAQ: SNDK) has bucked the uptrend of many of its distant relatives. But savvy company insider and ScanDisk Director, Michael Marks, has signaled that SNDK deserves more respect. He invested over $2 million more in the firm at an average price of $40.61. His 50,000-share investment doubled the stake he holds directly and through various family trusts and firms that he controls.

I first made money with Marks a lifetime ago, when he was running the show at Flextronics (NASDAQ: FLEX) and where he is still a director. Years ago, Marks had the audacity to challenge the Securities Exchange Commission (SEC) in its investigation into Flextronics’ accounting procedure for acquisitions. He also thought the SEC’s tainting of his firm’s shares back then was a great buying opportunity. He turned out to be right on both counts.

More recently, he has proven adept at timing the shares of other firms on which he is a board member. He bottom-ticked Sun Microsystems (NASDAQ: JAVA) this summer during a pull back. He is also still well in the black with a bet he made in Schlumberger Ltd. (NYSE: SLB) last August. Meanwhile, he was smartly selling shares of Crocs (NASDAQ: CROX) leading up to its recent plunge. That’s quite a track record.

Commodity Problem

To be sure, the fact that ScanDisk is in a strong sector of a lagging industry is hardly ideal. The fact that SNDK’s weakness results from industry factors outside of the company’s control is even worse. Sure, the flash-memory cards ScanDisk makes are ubiquitous, but they are also a commodity. And right now, it’s a buyer’s market for flash memory. The debate is not about whether flash-memory prices will fall in coming quarters. It is about how much.

Bears — who are short 6.2 percent of ScanDisk’s float at last count — think the oversupply of product means that price declines are not yet fully priced into SNDK. Opportunists can argue that the stock has found support at about the $37 level over the past two years, and that the risk in this stock is sufficiently incorporated to at least make a trade. Bulls can latch onto ScanDisk’s recent push to defend its patents, and neat-o new products like its TakeTV USB device to play digital video on TVs. Fundamentally, they can further point out that ScanDisk just announced a huge quarter with a 38 percent increase in sales, and profit that blew away estimates.

Count me more in the (attempting-to-be) opportunistic camp, and I’m willing to give ScanDisk more credit than the bears do for its intellectual property. While flash memory is unquestionably a commodity, ScanDisk is the market leader for a reason. It may not be the flash memory equivalent of the iPod to MP3 players, but it has both name recognition and more innovation than most of its competitors. I think it’s at least worth a trade.

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Jonathan Moreland is the Director of Research at New York-based Insider Insights.com. Click here for a FREE trial issue of the firm's weekly newsletter Insider Insights.