Jumping on stocks that are in the middle of a cyclical downturn -- like computer-storage giants Seagate Technology (STX) and Western Digital (WDC) currently are -- can be an incredibly fertile way to invest.
That's because Mr. Market operates in a very bipolar fashion when it comes to business cycles. He massacres companies during declining periods, but quickly favors them once a cycle improves.
However, smart investors will use a counterintuitive approach when it comes to cyclical stocks. They'll sell when the cycle is expanding and buy again when the industry experiences declines.
After all, no one can accurately time exactly when a business cycle will turn -- but the market is a forward-looking creature. So, cyclicals' prices generally become overbought when a cycle is expanding, then oversold as it contracts.
The oil industry is a great example of this, but it's not the only cyclical business that's feeling pain these days. On the completely opposite side of the spectrum is the data-storage industry.
Computer users still mostly store information on hard-disk and solid-state disk drives. And while "cloud" storage is rapidly expanding, cloud systems still require servers -- and servers still need disk drives.
But unlike most tech sectors that are flooded with competitors, the storage business is basically a duopoly between Seagate and Western Digital. STX and EDC account for 84% of hard-drive sales, which are split almost evenly between them.
However, both Seagate and Western have seen their share prices tumble by some 50% in less than a year amid a cyclical slowdown in drive demand (primarily stemming from a slowdown in PC sales).
Let's take a closer look at both:
This firm pays out $2.52 per share in dividends, for a juicy yield of nearly 10% given the stock's roughly $25 current share price.
Such an abnormally high yield is usually an indication of a pending dividend cut, but that might not be the case here. That's because analysts expect Seagate to earn around $2.80 a share in the fiscal year ending this June. Those who follow the stock also expect fiscal 2016 to represent a bottoming out for Seagate's profitability.
This stock trades for just some $41 a share, down from $100 less than a year ago. That translates into a sub-9x trailing price-to-earnings ratio.
But WDC's dividend yield is quite good at roughly 5%, while the company recently shelled out $19 billion to buy SanDisk. That deal will catapult Western Digital into the business of flash memory, which is what smartphones and tablets use.
The Bottom Line
Seagate and Western Digital own the storage market -- a business that might be changing, but certainly isn't disappearing.
Both companies also seem to be taking steps to adapt to these changes. So, given their impressive dividend yields and depressed share prices, I believe Seagate and Western Digital both merit a closer look.