Micron (NASDAQ:MU) has been on a tremendous run over the past year. The stock is up approximately 150% over that time period. As some have pointed out, the stock fundamentals currently justify the valuation. Even so, this does not mean the stock is immune to a pullback. In the following sections, I will make my case.
All bull runs end at some point
"Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria." ~ Sir John Templeton
The stock is up 150% over the last year.
Furthermore, the stock is up nearly 50% in just the past quarter.
At this point, it's hard to find someone who is not bullish on the name. For instance, the last four focus articles published by Seeking Alpha have been extremely bullish. You can find them here. Furthermore, when someone does write a negative piece on Micron, the bulls come out of the woodwork defending their positions with great fervor. These are signals to me that the end of the bull run may be near or at least a pullback is on the horizon. I see these as telltale signs we are in the euphoric phase of the bull run. This is the final stage prior to a pullback or correction, as Templeton suggests in the above quote.
The risk-reward equation is negative at this point
With a 150% gain over the last year, it is hard to argue the stock is not priced to perfection. When situations like this arise, investors tend to make mountains out of molehills. Any slightly bad news may cause a sell-off in the stock. Moreover, it's hard not to believe most of the good news isn't already priced in at this point. A downgrade based on valuation by an analyst is often the catalyst for a sell-off in these types of situations.
Expectations become harder and harder to beat
Sequential earnings beats become hard
Micron hammered earnings estimates by a handy margin the past quarter. This is the good news. The bad news is all that it does is cause analysts to up their estimates for next quarter. As analysts raise the bar, it becomes harder and harder for the company to successfully exceed them. Think of a high jump contest as an analogy. At some point, no one can get over the bar. Right now, expectations are set extremely high for Micron going forward.
Historical comparisons become tough
A second issue is the historical comparisons become harder and harder to beat. Now that the company has achieved such a great quarter, the next quarter needs to be even better. The company can no longer simply beat expectations by a narrow margin. Micron will have to greatly exceed expectations with solid growth for the stock to continue higher. These factors must be taken into consideration. A stock's performance after earnings is not about the raw data. It is based on whether the company exceeds expectations and by how much. At some point, it becomes a losing proposition.
The paradigm shift from cyclicality remains to be proven
Many have touted that we are currently in a secular market with regard to the semiconductor industry. Historically, the semiconductor industry is highly cyclical in nature.
Many believe there will be unending demand for chips as more devices needing them are brought to market. Another big positive cited by proponents of the secular theory is that we have ventured into a new paradigm where these products will no longer be valued as a commodity, due to Micron cornering the market. This gives Micron the ability to control capacity and therefore price.
Nonetheless, history has shown major changes to the DRAM supply demand equation have been fatal for Micron's margins, and therefore, the stock's performance. I am so sure things will be different this time. Competition will remain a factor from the likes of Samsung and others.
Insiders are selling
Over the past six months, insiders have been doing nothing but selling. Currently, insider ownership is down over 17% in the past six months.
I have read the comments from the bulls when this fact has been brought up in the past that this is a non-issue. It almost seems like the bulls have been completely desensitized to insider selling at this point. Here is the bottom line on this issue. Insiders are taking profits on a regular basis. I'm suggesting anyone who has a large gain at this point should do so as well. I'm not saying to short the stock. All I'm saying is if you have a significant gain, it may be a good time to take a few chips off the table.
All ships rise and fall with the tide
The Nasdaq Composite (^IXIC) was down over one percent Tuesday.
If the entire market gets taken down due to some type of macro geopolitical event, Micron's stock will not be immune to the sell-off. This has been proven time and time again. The markets are trading at all-time highs, the geopolitical landscape is about as scary as it has ever been, and Micron hasn't had a major pullback for quite some time. These factors increase the risk of holding a large paper gain in the stock.
The other side of the coin
Micron exceeded expectations
Micron did exceed earnings expectations last quarter. This may be a precursor to more earnings beats in the future. If the company can continue to execute and exceed elevated expectations, there is definitely more upside to come.
Micron has cornered the DRAM market
The semiconductor sector has always been subject to the inevitable supply and demand peaks and valleys associated with commoditized products. If this paradigm has truly shifted, this will benefit Micron no end.
Micron's fundamentals remain solid
Micron's fundamentals continue to look solid. With a PEG ratio of .50 and a forward PE ratio of 9.33, the stock appears to still be undervalued.
Micron is a great company, and is still undervalued based on the fundamentals. I'm not saying anyone should sell out their entire position today. I'm just saying take a look at your portfolio and do some position management, if necessary. Take some profits if you have a large gain. You have to take profits to make profits. If you are a new investor thinking of starting a position, I would wait for some semblance of a pullback prior to starting a position, or at least scale into one over time. Knowing when to buy and when to sell is paramount in the investing game. Most investors sell at the exact time they should be buying and buy at the exact time they should be selling. Thanks for your time. I look forward to your comments.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.