Shares of Micron (NASDAQ:MU) have finally stalled out after a monster rally higher. MU stock has rallied nearly 40% in the past month after bottoming out at $32.50 in late June. Although some of the move higher is undeniably justified given the earnings beat on June 25, Micron stock looks to have peaked. Time to take a short-term short in MU.
Micron stock is ridiculously cheap from an absolute P/E perspective, but will always be so. This is due to the commodity type pricing nature of DRAM and NAND. It is important, then, to look at valuations on a comparative basis in MU. The recent rally has now taken the current P/E on Micron to near 5.5. This is the highest reading since May 2018 which marked a significant top in MU stock. Micron is getting expensive on a comparative basis.
MU is also looking a little over-extended from a technical take. Micron reached the most overbought levels on a 9 day RSI basis in the past year with a reading over 80 before finally weakening. MACD vaulted to a similar lofty level before dropping sharply as well. Momentum also peaked at the highest point of the year before falling too.
MU stock is also trading at a large premium to the 20 day moving average of $43.83. Previous instances led to pullbacks towards the average. $44.75 is a major inflection point, so a break below that level could propel Micron stock even lower.
The last leg of the rally higher was due to a Goldman Sachs upgrade on July 22. Analyst Mark Delaney raised his price target from $40 to $56 with the expectations of faster inventory depletion. DRAMeXchange, however, points to an overhang in supply of over 3 months with a slim chance of a reversal of structural supply and demand in the DRAM market. Interesting that Mr. Delaney expects earnings for Micron in 2020 to be below analyst estimates, yet upgraded the stock now anyways. Makes perfect sense to me-and probably has nothing to do with MU racing past his $40 price target.
Investors looking to add some bearish exposure to their portfolio may want to consider shorting MU stock on any strength. The initial profit objective would be a pullback to the 20-day moving average near $44. Option traders could take advantage of comparatively low implied volatility and buy the Sep $46/$44 put spread for 80 cents. A close below $44 at expiration would equate to 150% gain-risking 80 cents to potentially make $1.20.
Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to https://marketfy.com/item/options-and-volatility.
