In early 2018, Wall Street's favorite sector was semiconductors. Why not? The shares of Micron, one of the industry leaders, had risen from $10/share in March, 2016 to over $61/share by May, 2018. The business news outlets hardly let a day go by without mentioning the stocks - and their strong fundamentals and "unusual call activity."
What the "talking heads" failed to mention was that their enthusiasm - virtually at the stock's high - was at precisely the point where the memory cycle was peaking and an "air pocket" in bit demand for DRAM and NAND was about to commence (in a broad sense from mobile, data center to the enterprise end markets).
I spent some time profitably on the short side of Micron this year - having warned about the commodity like nature and risks to the company's shares.
From September's In Late May, Micron's Share Price Reflected 'Group Stink' and Lemming-Like Complacency:
Let's try to connect the dots in the face of what I call "Group Stink."
The continued fall of two prior darlings, Intel (INTC) and Micron (MU) , should remind us of the poisoned cocktail of "Group Stink." Though the market recovered from a possible breakdown in prices on Tuesday, should the market fall (as I expect over the next six months), there will be many more such "fallen angels."
Micron is trading down another $1.50 this morning at about $42 (it traded at $65 at the end of May) after Goldman Sachs downgrades the shares from buy to neutral (lowering the price target to $50 from $68):
"Delaney, the Goldman Sachs analyst, who is not making a call on the upcoming fiscal Q4 results on September 20, sees weaker fundamentals for DRAM and NAND in calendar Q4 and the first half of 2019. He expects Micron's gross margin to decline sequentially from Q4 of 2018 through mid-2019, and he notes that the stock is historically well correlated with the company's gross margin. His view of margin declines is due to lower memory average selling prices, both from more "challenging" DRAM conditions and also NAND oversupply. Further, Goldman notes that his 2019 earnings per share estimate for Micron is now 31% below consensus expectations. Memory downturns usually last for several quarters and can see an acceleration in price declines, as customers delay procurement to wait for lower prices, the analyst tells investors in a research note."
The complacency regarding the S&P 500 (which is within 1.5% of an all-time high) is something to behold in the face of numerous policy, political, economic, geopolitical and other outcomes (many of them adverse).
Maybe, just maybe, the S&P 500 is where the price of Micron's shares were on May 30.
Resist the temptation of the consensus and "Group Stink" and recognize the value of being a contrarian:
* Remain skeptical to the core - especially of the "shiny investment objects" and asset classes (e.g. Crypt0) du jour
* Do your own homework - turn off the television and look down at the balance sheet and income statements
* Always calculate upside reward v. downside risk (buy value, sell hype)
* Recognize that the investment mosaic is complicated
* Avoid single variable stock selection strategies that appear to make the trading/investment game easy (flow, "unusual options activity," a stock price chart, etc.)
* Respect your hard earned capital - few others (that you might be paying attention to) will
* Develop a sense of history
(This commentary originally appeared on Real Money Pro on Dec. 19. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)