All this trade-war talk has been a bit hard on Micron Technology (NASDAQ:MU). Those concerns are not without merit, but the reaction on Wall Street has been a bit over the top. In fact, MU stock is down more than 18% from it’s May highs. But this sell-off has created a bullish opportunity.
There has been quite a bit of hype for Micron in the financial media this year. However, it’s important to remember that there are still some MU stock bears out there. This is comforting from a contrarian investing perspective. Otherwise, we wouldn’t have developments like we had yesterday.
About a week ago, UBS reiterated it’s “sell” rating and $42 price target on MU stock. The brokerage firm believed in a major correction in the DRAM market in 2019, one that one severely impact Micron. Yesterday, UBS reversed course.
After revising its projections for DRAM pricing next year, UBS upgraded MU stock to “neutral” from “sell” and boosted its price target to $50 from $42. The reason for the change is an apparent delay in DRAM production at Samsung — one big enough to impact DRAM prices on the year.
If one long-term MU bear is shifting its outlook, it’s possible that more could follow. According to Thomson/First Call, a trio of analysts are still holding out on MU stock, compared to about 29 “buy” ratings. If Micron price action were to break down, this wealth of “buys” could be a risk. For now, though, any upgrades represent the rest of the market playing catch up.
Click to Enlarge And there is plenty of catching up to do. Micron is considerably undervalued. It’s price-to-earnings ratio remains the lowest of its peers at 5.48. What’s more, the stock is trading nearly 47% below the consensus price target of $80.76. That’s quite a bit of rally room.
Technically speaking, there are few hurdles to slow a MU rally. The shares are poised to rebound from this week’s trade-war induced selloff, reclaiming their 50-day moving average and support at $55 in the process. The next potential hurdle for MU lies in the $60 region, and it’s all-time high near $65 above that.
A move back above $60 could spook the remaining MU stock short sellers. And there are still a surprising number of those. As of the most recent reporting period, some 50.6 million MU shares were sold short, representing 4.57% of the stock’s total float.
Short interest fell 16% during that period, and the recent pullback has offered a respite for additional buyback. Look for short covering to continue as MU rises and to spike once the shares top $60.
This sets up a nice short-term bullish opportunity for MU stock. But how far can we expect to MU shares to move? According to July’s implied volatility, about 9%. This puts the upper bound at $60 and the lower bound at $50.
2 Trades for MU Stock
Call Spread: Traders looking to bank on a rebound in MU stock might want to consider a July $57.50/$60 bull call spread. At last check, this spread was offered at 60 cents, or $60 per pair of contracts. Breakeven lies at $58.10, while a maximum profit of $1.90, or $190 per pair of contracts — a potential 216% return — is possible if MU stock closes at or above $60 when July options expire.
Put Sell: On the other hand, if you are looking for a less volatile trading strategy, then a July $50 put sell position should have you covered. At last check, this put was bid at 82 cents, or $82 per contract. In this trade, you keep the premium as long as Micron stock closes above $50 when July options expire.
On the downside, if MU trades below $50 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $50 per share. That said, buying MU stock at $50 would be a steal.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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