Asset Class: US Stock (Sector: Information Technology / Industry: Semiconductors & Semiconductor Equipment)

Original Investment Thesis (2/2018): Cyclical company with almost no debt in an industry that is known to be boom-bust.  My bet is there will be way more boom than bust (over the long term).  I like everything they’ve done since the ‘08 financial crisis to position themselves for bad times.  I also bet if anyone can be successful in this industry it is this company that is well-positioned in a variety of ways to dominate.  They make the stuff that is going to be in the equipment that will drive the world’s economy over the coming decades.

Current Thoughts (9/22/2019): Long term holding.  This has been a wild ride (and will likely continue to be).  Cyclicals can get absolutely crushed on the downswings.  I’m positioned for a downswing right now (ready to add more at 60%-80% lower if it comes). If no downturn I see plenty of upside (at a very attractive valuation in this investment).

Buying More $MU

December 2018

Sold: ESIO – Electro Scientific
Bought: MU – Micron Technology

Thinking: One of my investing rules is that I don’t add to positions after I buy them initially.  That said I have been working on my investment analysis tools. I’ve actually been working on it quite a lot as a matter of fact (incorporating things I’ve learned over the past year).  So when I was done I wanted to revisit this position for several reasons. I just ran everything back through my new tool and liked what I saw very much which gave me the justification I needed to add further to this position (and break my investment methodology rule)

When I bought this stock back in Feb 2018 this was my investment thesis:

MU – Micron Technology – The Micron story is DRAM (meh) and SSD (not meh).  I actually get most excited about the SSD side of things as I think there will be a huge conversion cycle into these types of drives over the coming years.  The stock is a cyclical stock and you generally don’t want to be buying cyclical stocks at peaks in the cycle (which everyone believes is where we are with this stock…and we very well might be).  But a few really smart guys that I follow on my ‘guru’ list are holders (David Einhorn, Joel Greenblatt, Tobias Carlisle, Ray Dalio) so that makes me one too. I initially reviewed this stock back in late 2017 and passed due to the debt.  I’ve read up more on Tobias Carlisle and his Acquirers Multiple and it nudged me into taking a position in this after I looked it over again. He was actually on The Investor’s Podcast in the Q1 2018 Mastermind discussion and this was his pick.  I think this stock is going to grow and grow and grow some more. So, if I’m wrong and we are at the top of a cycle then it is currently priced fairly for the coming low part of a cycle. If I’m right and we are NOT at the top of the cycle (or we are but it just doesn’t matter to MU who will continue to grow) then it is absurdly cheap.  I’ll take those odds. The other issue with this cyclical stock is they have debt (which is never a good thing)…but they don’t have a ton of debt (34% debt to equity)…and their debt levels are way down (down from 76% in 2016 and 53% in 2017)…and they have a plan to continue lowering it ($2B down in current quarter and have a debt reduction plan).  Their share count has varied and has increased over the past decade but they have done several acquisitions in 2016-16. I’m adding this stock with a 70% certainty rating.

Micron is a seemingly hated cyclical stock with an absurdly low PE, clean balance sheet, and in an industry that should grow like gangbusters over the coming decade. I’m not an expert but I think SSDs are in a big conversion. I also think all the AI, blockchain crunching, and autonomous cars/robotic stuff will drive huge demand too. I think both will be for a long time. I know they are a cyclical company but I also think we ‘might’ not be at top of the cycle. If we are top of cycle I think they should weather any coming cycle just fine (or at least better than competitors)!  I’ll explain why.

I know that some of the recent year’s numbers are potentially peak cycle and higher than they will run at going forward. That said, I have no idea why this company is so much cheaper than the other 65 companies in the industry. I’m not sure what I’m missing here…must be something really big…that I just can’t find.  Weird. I believe that if we are indeed peak cycle that the other semi companies have a lot further to fall to become fairly valued than Micron does.

Part of my analysis is chopping what I already view as pretty justifiable/borderline conservative estimates in half.  When I do this Micron still looks like it will wind up being a good investment and annualize well ahead of the overall stock market.  Then if I just average the last 10 years earnings it also still produces a decent return (again outpacing what I believe the overall market will return).  Micron is a completely different company than it has been over the past 10 years (not even close). I think the combination of all this provides a good margin of safety for this investment.

They’ve increased shares outstanding during their growth and acquisitions…sure…but they are 8% off their peak and they have a $10 billion buyback plan (for 2019) that will take down 23% of share at current prices.

They also had debt during their growth and acquisitions…sure…but they are off recent highs of 76% debt to equity in 2015.  Even since I bought it initially it is down from 34% to 12% TTM. This is the lowest debt level this company has had in the past 10 years.  That is the kind of peak cycle I like to see! Sitting at 12% debt to equity and increasing revenue from $5 billion-ish in ‘08 to $30 billion-ish TTM is pretty staggering growth.

They are currently spending about 29% of sales on Capex (which might not be wise at peak cycle) but they are doing it while also decreasing debt (and buying back shares).  

I’m not sure of the exact definition of wise capital allocation but their debt, buybacks, and reinvestment look very good to me.  Their current industry-beating (over a long period of time by the way) Return on Assets and Return on Equity should remain intact going forward.

On the management front, they have a newly named CEO, but he has been with the company (through acquisition) for some time. No concerns. They seem to be/are setting the business up to weather a storm (which I like it) but also staying focused on growing (if a storm doesn’t come).

The company is in a ‘commodity type business’. I tend to believe that Micron’s size and expertise gives it a bit more moat on that front than it is given credit for. New advances/products don’t just appear they are developed…and I think Micron is a (and potentially ‘the’) leader in this discipline. So I give it a bit more moat than traditionally associated with companies like this. I think demand for their products (and products they can develop) will outstrip their ability to develop it over time.

Finally a long, long time ago I didn’t buy $MO (when all the tobacco lawsuits killed that stock). I’ve always regretted it (because I’d be retired now if I had). So maybe another similarly ‘tickered’ stock $MU can make up for it! They both start with an M and are two-letter stocks!?!  Ha! Now that is heavy-duty analysis!

I’m adding to this position due to my reanalysis producing a 103% certainty rating.  This is the highest rating I have ever calculated for a stock I’ve analyzed and much higher than when I reviewed it initially (mainly because my analysis has upgraded and I look at more things).  The higher certainty rating means I can allocate more capital to the position than I currently have allocated to it…so that is what I will do. I sold off my $ESIO position (which has been bought out) and reinvested part of it into Micron to round out this position.  I hope and plan to hold this position for a long, long time!

I’m sharing my analysis here.  If you have thoughts on it, I’d love to hear them hit me up on Twitter @joeydean72

Published by deanorolls

Well, if I told you that you wouldn't need to go to my would you?!?!

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