Adding Micron To The Elevation Portfolio

| About: Micron Technology (MU)

Summary

I see Micron making big gains in the DRAM market in 2016 and 2017.

A quick transition to lower nodes will lower costs, improve margins and increase market share.

I believe the Nasdaq will keep on charging ahead, and sooner or later Micron will follow suit.

We are buying 500 shares of Micron today.

Western Digital (NYSE:WDC) is the weakest position in our portfolio at the moment. Initially, we bought 100 shares at just over $46 a share a few short months ago, but as I write this the stock is trading slightly over $35 a share. I still feel as if this stock is heavily undervalued -- especially after the recent SanDisk acquisition, which went through for around $19 billion. While this acquisition has been looked at as bearish in some investors' eyes, I feel as if multiple synergies will eventually come out of the new setup. Why? Market share is one obvious benefit as consolidation continues to grip this industry, but another is cost synergies, which should enable the partnership to gain even more market share over time.

We could double down on Western Digital, as I believe this stock might easily bounce back to the $60-plus level. But I'm going to go with a different company to play the current downturn among stocks in this sector. That company is Micron (NASDAQ:MU), and what follows are three reasons why I like this stock right now.

First, I like the moves Micron is making in the DRAM area -- especially its recent Inotera acquisition, which will undoubtedly strengthen its footprint in DRAM. Currently, Micron buys all of Inotera's output, which is around 35% of current Micron's DRAM output. The move will solidify control even more and will enable Micron to fully deploy its leading-edge 20 nanometer technology on 100% of Inotera's production sometime this year.

Second, even though prices of DRAM continue to decrease, Micron has been preparing accordingly. Consolidation measures, as mentioned above, will mean more market share in a market where demand is still rising; plus, early moves into faster-moving markets, such as mobile and services, will ensure the company continues to grow. Many bears harp on the idea that decreasing DRAM prices will end up being detrimental to Micron's hopes, but I don't see it this way. Initiatives such as transitioning to 20nM will undoubtedly increase sales as well as reduce costs, which should return gross margins to former levels.

Third, any followers of this sector will know that attaining first mover advantage is everything. Why? Well, even though the 20nM will increase cost competitiveness, competitors such as Samsung and Sk Hynix are already using this node, which means that DRAM prices have already adjusted. Therefore, the big early inflection points can happen if a company can come out with technology before its competitors. That's what Micron is hoping for with its next piece of DRAM technology, which would really re-price the stock higher.

The chart below shows how the Nasdaq has performed compared to Micron since Feb. 11, and we can see that the index is up over 10% in this time frame while Micron is down over 3%. Now, I believe we will print a daily cycle low soon in the Nasdaq (that might have happened on the 6th of this month), which would in turn give us another five to eight weeks of rising prices on the Nasdaq.

I believe it is only a matter of time before the Nasdaq breaks out to new highs, and this is why I also believe that Micron's downside is limited. Why? Well, at the moment, Micron's earnings multiple is 9.9 and its sales multiple is 0.8, both of which are well below the company's historic averages and industry averages. Now, if the Nasdaq and Micron continue to trade in opposite directions, then eventually value investors are going to come in and start picking up Micron because its fundamentals are still sound (in my opinion). This industry is very cyclical, and the recent shake-out has created more consolidation. That means there is actually less competition in the DRAM market, for example. It's all about who can develop the technology the fastest in this space, and I still believe Micron will be a leading player in the years to come.

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To sum up, I'm going to be adding a few good dividend and growth stocks to the Elevation Portfolio over the next several weeks, when I see value. It's imperative that they are not correlated and all don't have similar valuations in order to ensure that income is brought in every month; that, over time, will increase our share count. You can follow along by pressing the "Follow" button above. The action today is as follows: buy 500 shares of Micron.

Disclosure: I am/we are long MU.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.