It is easy to write bullish articles on stocks that are exploding higher. Micron (NASDAQ:MU) rallied an incredible 75% off the quarantine bottom in March. My point today will upset fans because I argue that there will be much better entries into MU stock than at the highs we just saw.
My conscience is clear on this front. Because just as it is easy to make bullish calls on the way up, it is harder to make them when things are tough, and that is exactly what I did last year. When things were not going as well, I wrote a bullish article titled, “Micron Stock Is Headed to $56.” That trade delivered huge profits for those who agreed with it. But here I would rather wait out this incredible grab for stocks. I could even short the top.
My problem is not the company or its management, because they have a long-term proven record of executing well on plans. Their business thesis also remains very healthy because the globe is finally kicking the digitization process into high gear.
The virus-induced lock down forced everyone to rush into everything virtual. This will ensure that the trend is sustainable and that the demand for Micron products and services will remain strong for years to come.
MU Stock Priced for Perfection at These Levels
This leaves the question of timing and the MU stock chart doesn’t inspire bullish conviction. It’s best to use the chart technicals and overlay them onto the fundamentals. I remember the days when it was falling below $30 per share and the experts kept calling it a “value trap.” Back then the price-to-earnings ratio was under 3.
On this rally, the P/E grew ten fold so it is impossible for me to understand how these so-called experts can now pound the table when it is ten times more expensive relative to itself than when they were saying to sell it.
This matters because Micron is not a grower, so profitability matters. I wouldn’t use the same metric to caution against a stock like Shopify (NYSE:SHOP) or Zoom (NASDAQ:ZM), for example. But for mature, steady companies, it is absolutely an appropriate metric. The bottom line is that up here I see better odds of downside than upside potential even at the risk of missing out on a few bucks in case I am wrong.
Furthermore, the economy is still worse than it’s ever been, yet the stock markets are setting records. There is added extrinsic risk from that divergence. If the bulls are wrong then there is a long way down in the indices in general. MU stock would also suffer those consequences and to no fault of its own.
Micron Is Headed into Resistance Levels
The stock looks like a super star because of its three month rally. But this is deceiving because of where it started the run after falling into the Covid-19 crater. Moreover, when a stock recovers to a level from which it fell hard earlier it faces resistance.
Anything above $55 per share will present a technical problem to the MU stock bulls. Onus is on them to take that out before spurring another round of buying. Until then, I bet that Micron will be a better buy between $42 and $44 per share.
If the investment purpose is to own the company for decades then the short-term action is meaningless. However I prefer starting off positions on a good note. The least investors can do here besides waiting out is not take full positions all at once.
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.