Why Is Sandisk Stock Still Dropping?

Is Sandisk (NASDAQ: SNDK) stock overbought... and overpriced?

Worries over a Morgan Stanley report yesterday, which compared the percentage of the S&P 500 index that is Sandisk stock versus the percentage Sandisk occupies in the portfolios of large institutional investors -- and concluded Sandisk is "over-owned" -- spooked investors yesterday. By close of trading, Sandisk stock had fallen 9%.

As we approach the mid-day mark Wednesday, Sandisk stock continues to drift lower -- down 2.2% as of 11:30 a.m. ET.

Over-owned versus under-owned

Morgan Stanley's number-crunchers did what they do, calculating percentages and concluding that certain tech stocks, including Apple, Microsoft, and Amazon, are all "under-owned" (because institutions don't own as much of them as S&P does). Other stocks, and Sandisk in particular, are conversely "over-owned" -- because they're more popular on Wall Street.

But here's the thing: Analysts surveyed by S&P Global Market Intelligence predict Apple will grow earnings at about 13% over the next five years, Microsoft at 16%, and Amazon at 21%. These are all respectable numbers, of course, but Sandisk is supposed to grow earnings at 40%.

That's nearly twice the growth rate of the "under-owned" stocks.

Why Sandisk is popular

Not only that, but applying its growth rate to its price-to-earnings ratio of only 24, Sandisk stock sports a PEG ratio (that's its P/E divided by its long-term forecast growth rate) of just 0.6. That's a 40% discount off the 1.0 ratio that many value investors would consider a fair price for a stock.

At this price, it makes sense that Wall Street wants to own a lot of Sandisk stock. At this price, and at this growth rate, I kind of want to own Sandisk, too.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, and Microsoft. The Motley Fool has a disclosure policy.