But if you are stock investor it's all very different. You can't wait for that marginal plant to produce that marginal drive that flips pricing and crushes the average selling price. You have to anticipate that one or many of the commodity players will say, "We are going to expand." You have to get out of a commodity stock that's been red hot either right before or during the utterance of those words because you are now in a high-stakes game of chicken. Pros know this. Rookies are oblivious.
Now, experienced hands who trade and invest in commodity stocks know that there are mitigating factors. Some companies, like Micron, might be low-cost producers. Others might be consolidators that are busy actually taking out capacity instead of adding to it, which is what Micron did when it purchased the desperate Elpida, a Japanese DRAM amalgamation of several semiconductor companies, to rationalize the industry. Another mitigating factor is the possibility of a big economic expansion occurring globally. DRAMs are a global market that can sop up any additional supply, ensuring pricing doesn't fall apart.
All of these possible positives played out for Micron in the last 14 months, which drove the stock from $5 to $21, where it stood before it reported that terrific quarter last night.
Given that I know we are only one "expand" utterance away from a retreat, I cautioned that I wanted to hear the call and admitted to fearing that there might be additional capacity announcements mentioned on the call, either by analysts or the company. Fortunately for Micron shareholders, the company parried every attempt to suggest that pricing discipline could be lost.That allowed the stock to advance. As soon as I read the call I knew two things:
- Micron can still climb higher.
- Every rookie who owns it will be furious that I pointed out what could go wrong and what to worry about.