We saw so many groups rally today. We got a good read about some holiday sales for retailers, augmented by a challenge to the management of Dollar Tree (DLTR) that reverberated through the off price segment. We saw some strength in the beaten up oils now that crude's nearing $50. And, of course, we had some huge movers in health care, all tied to the JP Morgan Health care conference we're covering like white on rice.
But all of these moves pall in the face of the rally in the semiconductors and we have to do deep dive in this group before we let it get away from us.
What turned the group around after months in the doldrums?
I pin the tale on Micron (MU) , specifically a bold upgrade from BMO Capital that said it was time to "shed our bear skin" and get long the company. What changed? Price. It seems that Micron actually got cheaper as it went down, something that's actually unusual for tech because only the stocks of broken companies fall as hard at this one has.
Not that long ago this maker of DRAMs and Flash chips, the basic building blocks of so many devices, saw its stock hit $62. Two weeks ago it traded at $28, which is 4 times earnings estimates, the cheapest stock in the S&P 500. Micron's in one of those boom-bust cycles, where there was short supply for both DRAM and flash, and then flash glutted and recently DRAM inventories built up.
As is usually the case, many customers had double ordered to get the chips they want. Once more factories came on stream and demand weakened the double ordering collapse along with the price of DRAMs.
BMO's analyst made a decision that enough was enough, that the stock traded at 1.1. times book value and DRAM prices had to fall 44% from here for the company's earnings to drop to break even and that's unlikely.
I agree. The cost structure for the company, BMO points out, is $2 billion better than the last trough where the company had negative free cash flow, minus $2.6 billion in the last go-around and BMO says that won't happen again.
Micron's big guidedown when it reported last torpedoed a lot of stocks, including many of the semiconductor equipment stocks which have been disastrous. Then Nvidia (NVDA) , the revolutionary GPU card company, lowered the boom at the beginning of October.
Ever since then it's been all one way, with the coup de grace being the collapse of everything involved with Apple (AAPL) , like Qorvo (QRVO) and Skyworks (SWKS) and Cirrus Logic (CRUS) and even Texas Instruments (TXN) .
Today they are reversing and it is all about the bold Micron call. I should also add that Jensen Huang, the visionary CEO of Nvidia introduced some fabulous new chips with low price points that could reignite the flagging gaming cohort.
What should you do if you want in?
First, I think that Intel (INTC) is the cheapest and steadiest and makes a ton of sense because both the data center and the PC are back. Second, I would actually consider Broadcom (AVGO) as Hock Tan has diversified away from pure hardware and is working his magic with the amalgamation of CA, a software company for mainframes. Finally I would kick the tires on Texas Instruments with a stock that has fallen from $120 to $94 where it actually yields 3.5%.
This leadership group can make a big difference for the market. It could cause Lam Research (LRCX) , a 3% yielder that makes semi capital equipment to get out of its funk. It could get NXP (NXPI) going, a totally beaten down stock. And finally I think Micron is cheap; one more bad quarter and there should be little inventory in the system. No I don't think it can make the estimates yet. One more guidedown. But you can't wait for that guidedown. Better to go with BMO and this very big call.