We used to call it "riding the tiger" -- as in, are you willing to ride the fastest, most ferocious beast in the jungle to get you to where you have to go? And can you hop off before it gets real angry and mauls you, at best?
Few stocks have personified that wild ride than those of the commodity semiconductors and disk drives companies. They have historically been the biggest boom-bust stocks in the market. There are times when their moves up and down have been so breathtaking, that you have to tell yourself alternately: "how could I not have ridden that tiger?" or, "thank heavens that tiger didn't eat me on the way down."
But what if the ride only looks like it's on a tiger? What if that tiger has turned into a race horse, a thoroughbred that could have multiple quarters, or even years of traveling? What if the beast has indeed changed its stripes?
Micron is probably the prototypical boom-bust stock, the one that every few years is the best performer in the S&P and then every few years is the worst performer. Typically that's because the type of semi it is known for, Drams, the most basic commodity semi used as memory in virtually every personal computer, can periodically exhibit tightness in supply that allows Micron to raise price once it gets that generation's form down -- these are ever faster and better -- until the profitability is so obvious that one of its competitors decides that it's time to spend a few billion opening some new foundries to capture all of that profitability.
If you are riding the tiger, you need to know to get off it long before those foundries are producing Drams, because once that marginal chip is produced, pricing plummets.
Micron figured this out recently, so it moved into flash memory, or NAND as it is called. There simply aren't as many companies involved in the competition for customers and not as many new factories being put up, because the return's been that terrible. Now, tigers themselves typically don't change their stripes; it's almost a given that one of Micron's Asian competitors will do so. We got a bulletin the other day about an Asian company putting some plants on the drawing board and the stock got hammered.
Nevertheless, we know from my interview with Western Digital, which makes storage solutions, that flash memory of late has gotten very right, meaning that pricing is better, and that's allowing a lot of profit to fall to the bottom line. I have been pushing Western Digital endlessly since it bought Sandisk, which is a fantastic flash memory company, basically for a song, and is not reaping the harvest of that same cycle as Micron is.
But then, last night, along comes Seagate, which is a storage solutions company that is pure disk drive. It talked about how, because of new uses for large-scale disk drives, notably for the data center but also for surveillance, business has suddenly exploded, with average selling prices staying strong and no new capacity additions in sight.
So, you have Drams, flash and disk drives all much stronger than expected. Now, when these cycles are in the sweet spot, as they are now, you are riding a turbo-charged tiger and it doesn't matter who is president, as long as there's no new capacity these stocks will keep roaring.
At this point, we don't even have to wonder whether something has changed with the customer base. Are personal computers back? Does the internet of things require more storage? We don't know. But what we do know is that getting on this tiger now, after it's started its journey, is still the right thing to do.
Maybe it will turn out to be a thoroughbred and the ride is multi-year. But for the moment, after Seagate's remarkable quarter, when so many where betting against it?
Let's just say, climb on board and enjoy the ride.