It’s not a secret that the world is suffering from a chip shortage. This is most likely the byproduct of the world shutting down last year thanks to the coronavirus pandemic. I have confidence that companies will figure out a way around this soon. Therefore, the dip in Micron (NYSE:MU) stock is an opportunity for investment. This would be as long as the equity remains bullish on Wall Street.
The fundamentals for this company are solid.
I wouldn’t call them high flying marks, because they’re not. The revenues are growing at a moderate pace. And the company is making the best of it down to the bottom line.
The valuation for MU stock is reasonable. It has a low price-to-earnings ratio under 14x, and a price-to-sales ratio of 3x. Nothing from its financials indicates that it’s bloated.
As such, the slide in MU stock does not indicate that the story there is bad. Management is solid, but the investors are chasing sexier stories.
The whole chip sector is not moving in unison, so there are mega winners and laggards. Intel (NASDAQ:INTC) and MU are two quality companies that are simply not getting the respect they deserve.
MU Stock Is Near Support
Situations like these more often than not are opportunities for patient investors. On the opposite end of the spectrum there are companies like Nvidia (NASDAQ:NVDA), Advanced Micro Devices (NASDAQ:AMD) and Xilinx (NASDAQ:XLNX). These three for example are up 94%, 29% and 25% year-to-date, respectively.
Technically, Micron’s stock chart could have some good news. After incredible exuberance from last September, the stock lost 30% of its value since April. This is enough eliminated froth to warrant investor interest. Arguably, the rally last year accelerated once MU stock broke out from $65 for share.
As of last week, it had come within pennies of that neckline. From last year’s March low to its April highs, the rally was 213%. This recent downturn has given much of it back, and this is normal price action. It’s too late to sell since the correction came without any intrinsic reason.
The weak hands have already let go of MU stock. From here, the bears will need new negative catalysts to punish it. This makes for a reasonable entry position. That’s especially true for those who are interested in it for the long term. Those who know how to use options can even create an additional buffer zone. Selling puts below current prices makes for a good alternative to buying shares.
Moderation Is Key
Caution is critical here regardless of the method you chose. That’s because the indices are at record levels. This escalates the possibility of sharp and sudden corrections.
This week is full of potential catalysts. For example, the Federal Reserve is likely to officially announce the tapering of its asset purchases on Wednesday. We also have the jobs report on Friday. Either of these could easily solicit an emotional knee-jerk reaction in stocks.
Even though market dips are opportunities to buy the indices, they would foil any MU rebound. This means that regardless of how strong the individual story from Micron, investors need to remain cautious overall. Stocks cannot rally alone if the indices are correcting.
Last week, the Technology Select Sector SPDR Fund (NYSEARCA:XLK) and the Nasdaq broke out into open air. The upside potential from that could extend another 8%. If that happens, MU stock is likely to benefit and follow along. So far it is languishing, down 5% this year, while the XLK and the VanEck Vectors Semiconductor ETF (NASDAQ:SMH) are up 25%. This relative under-performance is part of the opportunity today.
The opinions on Micron among the experts are all over the map. I bet you will find headlines that tout that it is a screaming buy, while others call it outrageously expensive. Both extremes will be wrong in the end.
Ultimately, somewhere in the middle lies the truth.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.