I’m going out of town for a family wedding tomorrow, so no new trades this week. New trades usually result in lots of questions, and I want to be here to answer them as they come in so I’ll have a new trade for you next week.

In the meantime, I will elaborate on an exchange I had on the Personal Finance stock talk board yesterday regarding Western Digital (NYSE: WDC) that a couple of Systematic Wealth members have asked me to explain further:

Pat C. September 4, 2018 at 12:32 PM ET

“Hope you took your own que and sold [Western Digital]. I sold half in June down 7% when this sell off started. It has been downhill ever since. It’s like other flawed stocks, their flaws eventually catch up to them.”

Jim Pearce September 4, 2018 at 1:52 PM ET

“Actually, I have doubled down on WDC by buying a LEAP that expires in January 2020. In this case, I don’t think it is the stock that is flawed but the algorithms that value it based primarily on near-term revenue growth. Will be interesting to see if/how WDC resonds to today’s report out of Everscore regarding pricing pressure into next year.”

First, I’ll start out by acknowledging that I was early in betting on a turnaround in data storage stocks in general and WDC in particular. Clearly, the $85 call option on WDC that expires next month will most likely expire worthless.

Although my IDEAL Stock Rating system is good at identifying stocks that have become undervalued, it lacks a timing mechanism for determining precisely when they will start to turn around.

For that reason, I look at a variety of technical indicators for clues as to when a stock is oversold and most of the downside risk has been realized. On average, that has worked out quite well as witnessed by gains in all but one of our closed options trades this year.

But when it comes to Western Digital, it appears no amount of fundamental and technical analysis can divine exactly when its chorus of doubters will finally relent in pushing its share price down to seemingly ridiculous levels. At a share price of $60, WDC is valued at less than one times sales and less than six times forward earnings.

We saw similar pricing just last year in the retail sector. In fact, exactly one year ago Macy’s (NYSE: M) closed at $21.01; this morning, it opened at $36.02 (down from $41 last month) for a 71% recovery in just twelve months. Similar turnarounds have occurred for several retail stocks that had become grossly oversold due to exaggerated fears over the impact Amazon.com (NasdaqGS: AMZN) might have on their near-term results.

My IDEAL system flagged the retail sector as being grossly oversold last summer, which I wrote about repeatedly. I believe the data storage sector has now reached the same level of irrational pricing. However, since I don’t know what will trigger the same type of turnaround that the retail sector has enjoyed recently I feel the safest bet is to buy a LEAP expiring in 2020.

I realize that type of trade is not consistent with the short-term trading orientation of Systematic Wealth so this is not an official trade recommendation. But if, like me, you prefer to double down on oversold positions rather than eat the loss, this type of trade might make sense.

For example, the $55 LEAP on WDC expiring January 17, 2020 could be bought this morning for less than $12. There are no guarantees in the stock market, but I find it difficult to imagine circumstances (other than a stock market crash) that would prevent WDC from rising above the $67 breakeven price for that trade over the next sixteen months.