Western Digital And Seagate Share A Unique Correlation

At its core, the basis of the idea of portfolio diversification is correlation. There’s no point in owning five different stocks if each of the stocks has a large correlation with the others. Diversification only works to reduce overall risk if investments are free to move independently of each other.

Correlation is an important risk factor for investors to identify, and some stocks have extremely high correlations.

Hard disk drive (HDD) giants Western Digital Corp WDC and Seagate Technology PLC STX are two stocks that share an extremely high 0.77 correlation, according to Macroaxis.

If you look at the businesses of these two companies, it’s easy to see why the stocks share such a high correlation. As of the end of 2014, Western Digital controlled 43 percent of the global HDD market and Seagate accounted for 41 percent. In other words, the two companies combined to make up 84 percent of the HDD market.

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As the market for PCs has been squeezed, the HDD market has been battered by competition from solid state drives (SSDs) and now 3D NAND technology.

With pressure seemingly coming from every direction, it’s difficult for investors to see a long-term growth path for Seagate and Western Digital. The stocks currently both pay generous 4.0 percent-plus dividends and both trade at forward PE ratios of below 11. However, the stocks have been shunned as value traps in 2016 and are both down so far year-to-date.

Because Western Digital and Seagate are the two primary players in the HDD market, they have no true peers other than each other. Therefore, as the high correlation indicates, the companies and their stocks will likely face the same fate in years to come.