Adding to this long position before its earnings report tonight

You guys remember when we were loading up on Sandisk calls back when SNDK was in the $30s? It’s now at $51. And yes, we’ve taken a lot of profits along the way and as you might have noticed, the stock’s not been a big position in the portfolio lately. I’m not making it a huge position or anything, but I am adding to my SNDK before tonight’s earnings report. I’m bidding on some common and on some SNDK calls with strike prices around $55 or so and expiring out somewhere in the next three to six months.

I don’t just randomly pick which stocks I’m going to nibble on before earnings reports. We didn’t trade Apple, Google or any other stocks as “earnings plays” so far this earnings season.  The reasons I am adding to my Sandisk position before it’s report tonight, on the other hand, include the following:

  1. Apple’s huge iPhone and iPad unit sales from its report last night. Selling more than 20% more handsets than analysts had been expecting and selling 10% more iPads than analysts had been expecting — all those iP*s have NAND flash memory from the Sandisk/Toshiba joint venture that supplies Apple.
  2. The disk drive industry continues to be hampered by the natural disasters that destroyed the industry’s Asian facilities and prices for disk drives are higher than they would be otherwise because of that lack of supply. Higher prices for disk drives makes putting NAND flash drives in computers a lot more attractive a lot earlier than it would have been otherwise. This is likely being felt by the demand chain for NAND flash components right now and will continue for the foreseeable future.
  3. The disk drive industry is also suffering from an outright lack of inventory, making computer makers, DVR makers and other retail tech companies that use disk drives start to look for alternative solutions. Solutions like NAND flash that Sandisk sells.

The big risks to Sandisk’s quarter include:

  1. Margins could be off because the company’s spending to ramp up capacity.
  2. HTC, Motorola and Nokia are not selling many handsets and they are not exactly scrambling to source extra NAND when they can’t even sell the handsets they’ve spent the last year building for the market place.
  3. Seasonality — this isn’t the time of year that handset makers are scrambling to meet Christmas-time demand and we won’t know just how 2012’s year end demand will be until we get though this quarter’s report and the next one.

Anyway, as always — buying anything or shorting anything before an earnings report is very dangerous.