It's painful to get off a horse that's been so fabulous, whether it be a winner at the Kentucky Derby or first-place finisher in the stock market.
But that's what Goldman Sachs did yesterday to Micron (MU) , and I have to tell you that as much as I do like the company, I agree that the downgrade from buy to hold is a rational, reasonable move.
Micron makes flash memory, but more important to the downgrade, it makes Dynamic Random Access Memory (DRAM), which is the ultimate commodity product that has been in short supply of late.
The problem? There's been a 46% increase in the amount of capital the companies that make DRAMs are spending in order to take advantage of the skyrocketing prices. That's a dramatic amount, and because DRAMs are relatively easy to manufacture, this step up might mean that new DRAMs could come online as soon as the end of 2017.
If that's the case, then the gross margin increase that Micron has seen for four straight quarters will come to an end and the stock could come crashing down.
Now, many people do not understand the boom/bust nature of commodities, of which Micron is perhaps the most glaring example. But I have been living with the tipping point -- the moment when there has been too much supply for about 30 years -- and it is always bound to happen. Some companies simply can't resist and want to take advantage of the price increases, no matter what.
How bad can it get?
OK, one year ago there was a surfeit of DRAMs and Micron's stock traded at $9 a share. Nine bucks!
The Goldman analyst is well aware of that pattern and is simply trying to get ahead of it, rather than wait until the decline begins in earnest, even if it means missing a few points up.
I don't blame the analyst. In March, when the company reported a very large earnings surprise, the stock gapped up from $26 to $28 and change and then the next day it moved up a few pennies more. Ultimately it traded up to $29 and it's been dripping lower ever since. The fact that it couldn't break out higher and that it is lower now than when it reported the upside surprise is telltale for a top.
Sure, pricing can keep going up. Absolutely, the new plants might not come on as fast as we think. Yes, the customers might be wishful that their own gross margins will start rising because Micron's are going down.
Ultimately, though, if you follow this stock, you have seen what it is like when you downgrade it on the way down. It is farcical. Best to take it off now, before the rollover, even if you miss some points on the upside.
That's why I described the downgrade as rational.
That's why it just might turn out to be right.