Micron (NASDAQ:MU) stock started 2018 out well. Investors flocked to MU stock like moths to light and it quickly rallied $20.
Unfortunately in June that all changed. After hitting the $64 high, Micron stock fell into a $30 chute. It lost the whole rally and then some. In total, it corrected almost 50% from the highs. So now it comes into next week’s earnings from a position of weakness.
At these levels, MU stock is a buy and it deserves to be part of a diversified portfolio. This is a leader in the industry and a proven winner. The upside potential far outweighs the downside risk from here.
Technology now makes the world turn. There is hardly a facet of our daily lives that doesn’t depend on tech. MU is one of the staple suppliers to this tech so they will enjoy healthy demand on their products and services for years. This trend is not going to reverse.
This correction is not a Micron-specific problem even though it’s down 17% year-to-date. Other than Advanced Micro Devices’ (NASDAQ:AMD) freakish +80% performance, the whole sector is struggling. The VanEck Vectors Semiconductor ETF (NYSEARCA:SMH) is almost in correction territory. Even the once mighty Nvidia (NASDAQ:NVDA) is down 25% for the same period.
The semiconductor stocks have led this October correction down. They seemed to have started the slide early and fell deeper than the major indices. Traders perceive them as having issues with pricing power and inventory levels. So they are lagging the Power Shares QQQ (NASDAQ:QQQ), which is up 5%.
Nor is Micron a broken company. This perception is not reality. The business is healthy and the management team is proven for decades. It has $30 billion in revenues and $8 billion in free cash flow. AMD, the star of the show, only has $178 million in FCF. Furthermore, NVDA only has $9.7 billion in revenues and $3 billion in FCF.
Is MU Stock Still Worth a Look?
Although Micron stock has lost its early year momentum, it has value on its side. From here, it will take serious bad news to fall much further.
Technically, MU stock fell through October inside a sharp descending channel of lower highs and lower lows. But that recently changed.
Starting in November, Micron stock based and now has at least one higher low. This, combined with the continuation of lower highs, makes for a tight stock that has a lot of confined energy. This will cause a move to relive this tension. And therein lies the immediate opportunity in MU stock.
Today’s write-up is to argue for owning MU for the long run. But there is also a short-term trigger that could start it out on the right foot.
There are risks looming from the possibilities of having more tariffs to come in 90 days. The economy is about to see its yield curve invert.
More to the point here, this round of earnings has been filled with disappointments. Not so much from bad results but from the muted guidance.
Companies are cautious with their forecast so that they under promise and over deliver. MU has been decimated already and there is nothing but meat on this bone. There is little fat to shed.
Bottom Line on Micron Stock
Micron sells at a 3X price-to-earnings ratio, which is incredibly low. NVDA’s is seven times higher. More astonishing is the fact that MU is selling at book value, meaning Wall Street gives it zero credit for future growth.
Buying it here at these cheap levels inside a healthy macro-economy is not likely to be a financial disaster. In the long run, these temporary headline threats will abate and the fundamentals will retake investor focus.
The Wall Street experts agree since they have it as a BUY and it’s trading at almost half of their average price target. So there is much more upside to go from here. Time will get it there, so I can start building or adding to the position even now.
Click here for more of my market thesis and get an ongoing free copy of my weekly newsletters. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.