Micron (NASDAQ:MU) is playing a game most investors won’t be willing to concede. Indeed, it’s a game most investors don’t even know they’re playing. But betting on MU stock isn’t a value-minded play. It’s not even a bet on rebounding DRAM prices. It’s a bet on how other investors are going to perceive Micron’s prospects at some point in the foreseeable future.
And that’s a very tricky game to play.
It was almost starting to make sense right before two curve balls were thrown.The first curve ball is, of course, a trade war that took dead aim at China’s consumer-tech outfit Huawei, which by itself accounts for — or accounted for — 13% of Micron’s revenue. The other curve ball is the advent of China’s new DRAM maker Changxin Memory, which should be able to scoop up from Chinese business from Micron
Largely lost in the discussion is the fact that MU stock is now trading at what can only be described as a stupidly low trailing P/E of 3.1. The forward-looking P/E of 8 makes it more than twice as expensive into its most plausible future, though that’s still dirt cheap.
According to Bank of America Merrill Lynch that valuation says the worst-case scenario is more than priced in. TheStreet’s Tiernan Ray agrees, adding a psychological element to the matter:”With no remedy to DRAM’s woes this year, it certainly seems the bears have been given just about everything they could hope for in terms of bad news. That may mean a pick-up in shares as the market discounts better times in 2020.”
It seems counterintuitive, at first, and perhaps it is. It’sa perfect synopsis of the headache at hand. The cyclical bottom for DRAM prices and the cyclical bottom in bearish sentiment surrounding MU stock aren’t even close to being synchronized.
The added trouble is, nobody truly knows how close we are to either bottom. It’s entirely possible both are behind us.
MU Stock Investors Have Selective Vision
It’s not as if investors haven’t struggled with erroneously estimating the depths of trouble before.
When computer sales peaked in 2011, shares of the HewlettPackard arm that eventually became the consumer-oriented HP (NYSE:HPQ) initially tumbled, but turned around between 2013 and 2014. PC and laptop sales not only continued to fall, they began to slide in earnest in 2015, wiping away a huge chunk of that rebound.
HPQ has since recovered, making a turnaround move in 2016 that persisted through most of 2018. The point isinvestors confused hope with results.
Another case of misguided assumptions involves General Electric (NYSE:GE).
Although shares of the iconic blue chip turned around in 2009 like most other stocks did, neither sales nor earnings have grown since 2008. And that’s even after stripping out the impact of divestitures. Investors largely convinced themselves for years that GE would work its way out of trouble, until 2017 when it became clear that wasn’t going to happen.
The 80% rout suffered during the second half of 2018 essentially priced in eight years’ worth of deteriorating results too few people were willing to see.
Neither comparison is a carbon copy of what’s making Micron stock so tough to handicap now, though the underpinnings are the same. Namely, investors see the facts they want to believe, and ignore the facts that might conflict with their established conceptions.
The masses have largely convinced themselves that Micron is unsalvageable right now. They hold up Changxin Memory and the trade war as evidence, all the while ignoring the fact that Changxin’s IP leaves something to be desired, and that the trade war could end at any time as long as an unpredictable President Donald Trump occupies the White House.
Meanwhile, DRAM prices are still falling. That’s leading many would-be buyers to assume they’ll fall in perpetuity, though that’s clearly not going to be the case.
None of those factors are minor matters.
Bottom Line for MU Stock
It’s not a bearish or a bullish call. It’s just a much-needed reminder to not assume the rhetoric surrounding any stock at any given time is accurate. It might be, but it may well not be. And when that stock is a well-watched ticker like MU stock that inherently inspires emotional responses, the rhetoric is all the more skewed.
There’s no denying the stock’s trading at bargain prices right now. Bank of America and Tiernan Ray are both right in that regard. The value argument holds water, even if the DRAM glut and the tariff standoff persist.
Value isn’t enough though. As irrational as the doubts working against Micron right now may be, as John Maynard Keynes told us decades ago, “the market can stay irrational longer than you can stay solvent.”
The best course of action here may be to not play the game at all but to find another stock that’s proving more predictable.
As of this writing, James Brumley held no positions in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter at @jbrumley.
