Yesterday we noticed that the charts of MidCap ETFs looked primed for a run, provided the market cooperates. We looked under the hood to see which stocks in the MidCap ETFs might fuel that run.

Based on this, we have highlighted one stock that seems to be undervalued and worthy of your consideration: Western Digital (WDC).

WDC’s top and bottom lines are benefiting from:

• Increasing consumer use of hard drives for the playing, retention, and creation of digital content for personal use in the rapidly growing Consumer Electronics markets.
• Growth of the external hard drive needed for easy storage, portability and backup of music, digital photographs and video.
• Increased use of multiple hard drives in PCs for data backup and expanded storage capacity.
• The need for high performance hard drives in data-intensive applications such as Internet search engines.

We can see room for a higher stock price on many fronts:

We expect upward earnings revisions from Wall Street: For the past 5 years WDC’s has grown a more than a 20% clip. In the past 12 month its growth has accelerated to 45%. For 2009, analysts have WDC pegged for only 7% growth. The Correct Call believes that number is changing as we expect analysts to increase their outlook for 2009.

Currently WDC trades at only .95 times sales, meaning their revenue exceeds the total value of all its shares. If Western Digital were to trade at the industry average of 1.65, WDC’s shares would be worth nearly $49.

WDC’s P/E should expand: At a current P/E of 9.10 and a forward P/E of 7, WDC is trading at a major discount to the industry average of nearly 25 times earnings, yet it is growing faster than almost all its peers. In our view, this makes no sense. Higher growth usually equates to higher P/Es. At a P/E 10, less than half WDC’s 5 year growth rate of 20%+, the stock is 50% higher in 12 months.

We don't believe that WDC’s performance warrants such big discounts.

WDC net profit margin of 13.8% ranks 2nd in the data storage sector and its Return on Equity [ROE] of 39.81% leads the pack. Perhaps the ROE is being aided by the company’s $500 million share buyback program, but not enough to slow down its earnings power. According to a study done by the Investor Business Daily, Most stocks tend to have 15% + ROE before moving higher.

When you add it all up, growing consumer demand, likely earnings revisions, undervalued, strong earnings power, Western Digital looks like The Correct Call .

Disclosure: none