Micron: That Good Old Buy-On-Weakness Signal
Summary
- All the professional portfolio managers buy on weakness.
- They have to, because they buy in size, 100,000 shares at a clip.
- The rest of us wait for the breakout and chase price higher.
- Watch Micron go as this is now happening.
Micron (NASDAQ:MU) was continuously on our Buy-On-Weakness Report with a fundamental Implied Return buy signal that was hard to believe. The selloff below $40 just did not make any sense. Here is our chart showing our big, fat, fundamental Implied Return buy signal the bottom of the chart.
This buy signal survived all the selling that took it below $40. More important, our overall passing grade, which is our most important fundamental/technical buy signal, also survived the selloff. When sellers fail to reverse our fundamental and technical buy signals, our computer system issues a Timing, Buy-On-Weakness Signal. You can see that happened at the bottom of this chart.
Our Fundamental/Technical Buy Signals
Here is the chart on Jan. 9th showing these signals:
Notice, on the above chart, the very high grade of 88 out of 100. The Implied Return calculation is enormous, at 41.8%, yet the Demand is dropping and sellers are taking it down again despite our very attractive fundamental and technical buy signals. Crazy! As soon as the sellers finish and Supply peaks below the line, it is a perfect time, once again, to buy on weakness, like the professional portfolio managers.
And here is the latest chart showing these same fundamental and technical Buy signals:
Now Supply has improved to the point where Demand is driving price higher. Our Buy-on-Weakness signal clicks off and our Confirmed Buy signals click on. But don’t accept our computer answer, let’s drill down and find out why there was selling and why there is now buying.
Let’s see what recent analysts are doing and then drill down into the fundamentals they are looking at to make their targets. The consensus target is near $60 while recent analysts are upping their targets to $75-$85 according to finviz.com. If we use these targets, there is a possible appreciation of around 50% and that is close enough to the rather high implied return our computer reports are showing on the charts above.
Fundamental Metrics Attractive
No matter what fundamental metric you look at, it is hard to find anything that would justify the selloff below $40. The low P/E means there is easy room to move higher. The PEG ratio shows the bargain vs. future growth and is even color-coded green by finviz just in case you might fail to appreciate this low PEG.
Free cash flow is the favorite metric of most analysts. They will overlook many flaws if this metric is good. Again, this ratio is so good with MU that it is also coded green.
Price to sales, price to book, and the debt to equity ratio all look good. And the cherry on top of this fundamental sundae is the $5 in cash per share! So what is there not to like and why is the P/E so low on this stock and the implied return so unbelievably high? The answer is that the analysts could be wrong and the market could turn on a dime, where the market is flooded with product and prices and profits drop in the future. Micron keeps proving that is not happening yet. The rumors and the XLK take it down and the earnings and XLK keep taking it back up.
Conclusion
It looks like the market is now expecting good earnings on March 22! Price is running up ahead of that earnings report. The pullback was an opportunity to buy on weakness as indicated by our Buy signals back on Jan. 9. Our latest chart shows Demand chasing price higher, with our high grade and fundamental, high Implied Return Buy Signals in place.
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This article was written by
Tom’s book "Successful Stock Signals for Traders and Portfolio Managers" is available on StockCharts.com and Amazon. The StocksInDemand.com system is designed to make money using a combined fundamental and technical grade for each stock. Tom received his MBA in Accounting from St. John's University, where he taught courses on the stock market. He marketed fundamental research, technical research and quantitative research to professional portfolio managers during his Wall St. career. He uses all of these methods to pick stocks for investing and trading.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MU over the next 72 hours. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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