Picture 334% gains this summer

Here’s the deal: portable memory is huge thanks to digital pictures and phones. SanDisk (SNDK:NASDAQ) just reported an 80% gain in sales of cards that allow cell phones to store digital pictures. The company jumped 35% over the past month.

Its biggest competitor, Lexar Media (LEXR:NASDAQ), is the only other pure play in the field. It is now trading at US$6.07. These two stocks are my favorite plays on the evolving trend of digital photography.

Both of these stocks took off after earnings came out. The standard Wall Street play is to buy a few days before earnings and sell right before they come out. This is why you see so many stocks sell off after announcing better-than-expected earnings.

That has changed. The market is priced for bad news. Any good news is unexpected—even hitting the low number. Lexar announced that for the past months revenues increased 90% to US$54.6 million. Net income totaled US$4.3M vs. a loss of US$4.9 million. That kicked the stock into high gear.

The gizmo of the moment

I was buying a computer the other day at the local Office Depot. The sales manager told me that digital cameras and the printers that go with them were their best selling items last Christmas. He also told me that they generally go on sale right before the summer vacation season.

They are hot because the cost of a digital camera and the quality of the printers have reached parity with film. You can now print a 4x6 picture in your home office and have the same quality print as you would taking your film to the local drugstore.

Plenty of pixels

Again: There are only two pure plays on this type of portable digital storage—Lexar Media and SanDisk Corp. That means if you want to play in this area you have to buy one of these two companies. And you want to play.

As you can tell by the chart, Lexar is moving up quickly. I expect that by the time you get this it will have sold off a bit and allow for a nice buying opportunity.

This chart tells me that we have significant upside potential. There was some resistance at US$8 last December. We might shuffle around there a bit. But given the strong growth rate, new profitability, and looming busy season, I believe this company will see the top of its trend during this up cycle and hit US$10 to US$15 over the next three months.

The company has a market cap of US$400 million, year-over-year growth of 136% (and that seems to be accelerating) and a price-to-earnings ratio of 32. That’s a high P/E a first glance, but not outrageous. And when you factor in the growth rate that gives you a PEG ratio of 0.23. According to this valuation method, you’d have to rise 334% to hit fair value. That would put the stock price at US$20.27!

Buy Lexar (LEXR:NASDAQ) on dips under US$10.00.