Do you own Micron Technology (NASDAQ:MU) stock? If so, you must be incredibly frustrated that it trades for less than four times the fiscal 2019 consensus estimate. Semiconductor stocks have gotten walloped over the past three months; MU stock is down 19% through December 11.
However, it’s not alone.
According to Finviz.com, 32 out of 44 semiconductor stocks with market caps greater than $2 billion are down 10% or more over the past three months with nine down 20% or more.
Given the industry weakness, it’s not a good time to be considering semiconductor stocks despite what you might think about their future potential and value proposition.
I’ve Been a Fan of MU Stock
Technology stocks have been my Achilles heel in 2018 with many of my recommendations going in the toilet in the second half of the year. While I make my calls based on a buy-and-hold philosophy, it’s not fun seeing all the red numbers on my screen.
Take Micron, for example.
Here’s what I said about Micron in September:
“Four months ago, MU stock was trading around $65, over 40% higher than its current price. Its cash return [defined as free cash flow plus net interest expense divided by enterprise value] is 15.5%. By comparison, Amazon.com’s (NASDAQ:AMZN) cash return, according to Morningstar, is 1.0%.
“I’m not suggesting that MU is in the same league as Jeff Bezos and company, but it would be difficult to picture a situation that is better suited for a company to buy back its shares, even though its business conditions are deteriorating.”
At the time, MU was trading around $45. It’s lost 19% since.
There’s no question share repurchases are a good idea when the stock price is falling.
Micron repurchased $1.65 billion of its stock between Aug. 31 and Oct. 12; we’ll know the average price paid with the release of its Q1 2019 results on Dec. 18. What we do know is that the average price in those six weeks was between $42 and $52, well above its current price.
Hopefully, with a $10 billion share repurchase program in place, $8.5 billion in free cash flow, and $2.7 billion in net cash, Micron backs up the truck.
But Should You?
Never catch a falling knife goes the saying. That’s especially true for regular investors like you and me who can’t afford to lose too much on their investment.
Micron, the company, can, because the purchases it makes increases earnings per share, the ultimate arbiter for most investors.
However, you’ve got to have nerves of steel to make a bet on any semiconductor company at this point in the cycle — MU stock’s averaged an annual total return of 36% over the past three years — despite the fact it’s trading for less than four times its forward EPS estimate.
Estimates can change. Quickly.
The Bottom Line on MU Stock
My InvestorPlace colleague Luke Lango makes the argument that MU stock historically trades for nine times forward earnings. Fiscal 2020 EPS estimates suggest Micron will earn $8 a share at that point, resulting in a $72 share price, providing 100%-plus upside over the next two years.
That’s correct, in theory.
However, the analyst estimate doesn’t take into account a global recession.
Add to the possibility of a recession, the fact semiconductor stocks are one of the most cyclical industries out there, and I believe MU stock and all the other big players aren’t a good investment idea heading into 2019.
It’s time to play defense.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.