Surviving OCZ: More Than a Hard Drive Crash

NEW YORK ( TheStreet) -- If you're a current OCZ ( OCZ) investor, Tuesday's earnings release must have felt like your computer froze solid as you tried to save a document you spent all day working on.

The small miss and especially the guidance surely do not warrant the selloff on Wednesday. Look for bargains in the share price, but don't chase it.

OCZ Chart OCZ data by YCharts

OCZ has lost about 16% of its marketcap from Tuesday's close. The loss in share value is the result of earnings per share missing an expected loss of 12 cents to a dismal 17 cents per share. Revenue came in light as well at $113.6 million vs. the mean estimate of $115.7 million.

What truly captured Wall Street's attention is operating expenses. OCZ already was trading below the widely followed 200- and 90-day moving averages, adding fuel to the liquidation based on chart technicals.

The chart to watch for OCZ is the weekly chart. In the weekly chart, you can find support just above $4 and again at $5.15. Both these levels offer support and resistance. More importantly, both offer a history of reactions with price retracements that suggest OCZ will once again trade above $5.15 soon. The 200-day MA doesn't come into play on the weekly chart due to the relatively young age of the stock.

Revenue is a bright spot for OCZ. OCZ is computing at high speed with revenue hurtling over $110 million quarterly. That is an extension of 16% over last year. Management inculpated higher unit costs that squeezed margins. Based on sales it appears reasonable, and likely a short-lived obstacle.

OCZ Revenue Chart OCZ Revenue data by YCharts

OCZ blamed weak PC sales and competition for the quarter's poor power supplies sales and profit.

OCZ's CEO Ryan Petersen stated, for the first quarter:

It's important to note that our power supply business is experiencing significant headwinds in terms of both revenue and gross margins, as sales of desktop PCs which use these products continue to dwindle. As such, our power supply revenue and gross margin during the quarter were well below our expectations.

Insiders sold an abundance of shares in the previous six months. Insiders were not buying either, but with just over 8 million shares held by insiders, it's clear management does put their money into the company.

I like to see management's and investors' interests aligned. With OCZ, management owns over 12% of the company stock.

Micron

OCZ uses Micron Technology ( MU) as a chip supplier. Reporting by either one can help investors get a better understanding on how the other may report.

Looking at Micron's chart it isn't a great surprise OCZ didn't light up the quarter, although the relationship is not totally linear.

MU Chart MU data by YCharts

Based on my experience with gap downs following earnings misses similar to OCZ, investors will see short-term lows as soon as Friday. OCZ lost money again this quarter, but revenue continues to grow in a computer market that is very soft.

Bargain hunters and short sellers covering positions could push the price up quickly in relation to the gap down price this week.

Looking at the chart, I expect short-term resistance near $5 and again at $5.25. Round numbers often attract like a price magnet and repel, causing a bounce. Expect a lot of volume to trade near $4.50 a share, but also be prepared for bargain hunters to start positions under $4.25 as an entry.

OCZ doesn't have debt (relative to the cash on hand) and the price-to-earnings multiple is not out of line for the growth rate and considering the amount of cash per share.

OCZ Earnings Per Share Chart OCZ Earnings Per Share data by YCharts

If you are looking for today's drop to signal a buying opportunity, you may wait until the end of this week.

There is no hurry jumping on board with OCZ. Stocks dumping as a result of misses like this one take time for sellers to rotate out of and buyers to find value. Watch for the second break above $5 as the one that "sticks."

OCZ competes against Intel ( INTC), Seagate Technology PLC ( STX) and Western Digital ( WDC).

WDC Chart WDC data by YCharts

Intel shares have had a mixed reaction to Advanced Micro Devices' ( AMD) poor earnings release this week. Read my Intel and AMD Surviving AMD in an Intel World .

Intel also reports after the closing bell on July 17. OCZ's statements about the weak PC market fall in line with other tech companies and offer clarity on what to expect from Intel. Intel makes some of the most expensive small form factor solid state drives for enterprise use. I use Intel SSD drives in my scanning computers.

INTC Chart INTC data by YCharts

Intel offers consumer-grade SSD drives; however, the last time I checked on prices, the Intel brand sells at a considerable premium. If Intel grows their SSD market and or becomes aggressive with pricing, it could quickly change the outlook for OCZ.

Seagate reports after the closing bell on July 30, 2012, and the market is not pricing in the disappointment by OCZ. Seagate continues to trade off the technical support areas and appears to have a couple of price tests coming up.

Seagate is trading just below the 60- and 90-day moving averages and is well above the widely watched 200-day moving average. If Seagate is growing despite OCZ's record revenue, Seagate may sail above the resistance and use the moving averages as support.

STX Chart STX data by YCharts

Seagate uses solid state technology in several models and may have found a one-size-fits all type of drive by combining both solid state memory chips with a rotating platter system. The margining of technology offers greater speed than traditional hard drives, while costing less than a pure SSD.

What's the best play with OCZ? There should be a very attractive trade coming up by the end of this week.

Near the end of the day on Friday if still trading lower, sell out of the money puts. Fear of continued losses tends to push portfolio insurance prices up dramatically, while at the same time the stock should bottom. It's not one to get greedy with -- hold on for a few days and as the implied volatility falls (hopefully with a nice dead cat bounce) exit out with a quick hit and run for profits. Otherwise for longer term investors, the best play is to wait until we are closer to the next earnings release for an entry.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

At the time of publication, the author held no positions in any of the stocks mentioned.

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