Micron is a name that I have had great faith in, a name that I have also steered you wrong in regards to. Just know that if you are long this name, I have been in this fight next to you every step of the way, as this position turned from one of joyous victory into a serious exercise in risk management.
Just in the last week and a half, we have seen Micron hit with either outright downgrades, or at least reduced price targets from the likes of RBC Capital Markets, Goldman Sachs, Deutsche Bank, Macquarie and BMO Capital Markets. The problem -- or problems -- seem to be deterioration in both DRAM and NAND pricing power. When it comes to memory, weakness in NAND had been expected for some time now across the industry, but DRAM? That's a horse of a different color, and had to be priced in.
Does Micron have any allies? Why yes. Of course they do. Less than two weeks ago, Bank of America Merrill Lynch reiterated that firm's "Buy" rating and left their target price at an even $100. That would be nice. In fact, that would be an appreciation of 120% from last night's close. Late last week, David Tepper also appeared in the financial media and he backed the stock. In his words, Tepper remains "very, very long" MU. Analysts have made much of sizable inventories. Tepper spoke of sizable demand involving servers, cloud technology and autonomous vehicles.
MU is expected to report its fiscal fourth quarter after the close of business Thursday evening. At the last sale, the stock is valued at just 4x forward-looking earnings. That means very simply that either the name is badly undervalued, or expectations are overly optimistic. More than likely, in my opinion, we may see a little of both.
Consensus expectations call for EPS of $3.34. Whispers are now running toward a miss of roughly $0.04 after having seemingly leveled at a miss of $0.02 until this week. Revenue is projected at between $8.22 billion and $8.25 billion, so we're talking about sales growth that's still more than 33% year over year.
As it was in June, this week will end up being about guidance. In June, the firm raised expectations for this quarter and the stock ran on that. By the way, if expectations come to fruition, the firm will not have misled on that increased earnings and revenue guidance.
As most of you know, I pride myself on my ability to manage risk. Much more so than my ability as a stock picker, I feel that my ability to regularly reduce my net basis is what has kept me relevant for many decades in an undeniably tough game. Weighing risk vs. reward is part of this management, as is discipline at both target prices and panic/replenishment points.
For instance, I sold half of my MU long position at $57.40 in June. That was my panic point at the time. I still liked the name, honestly, but discipline is discipline. I started buying those shares back at $47.70 in August, and have bought them in several tranches down to $41.61 last week on the Fibonacci bounce. I am short multiple calls and puts that will expire in two days.
My net basis in a name clearly stuck in a downtrend is $43.37 -- nearly two bucks below the last sale. You can do this. Every one of you is capable of defending yourself when a core position comes under fire. You have to focus, and maybe also be a little eccentric, but if you're still reading at this point, you obviously have the IQ.
Plain to see for all, the daily Moving Average Convergence Divergence (MACD) is weighted by all three components. Relative Strength displays something more like relative weakness. Money Flow does, however, finally seem to be climbing out of the "cave of doom."
Can we count on anything here? Common sense teaches us not to. It would not surprise this trader in the event of negative guidance to see a re-test of that $41 Fib level. I have sold enough calls to completely cover my long. I am also short puts that increase my exposure at $41.
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What I am thinking of doing is adding exposure to the downside that would allow me time to recover if I need it, while further reducing my net basis. Keep in mind that Micron is a semiconductor name, subject to the whims of reckless passive investment, and is also more highly exposed than most to China-derived revenue flows.
Trade Idea (minimal lots)To aid in net basis management:
--Assumes MU long position of 100 shares equity (basis unknown).
--Sell (write) one $37 November put option (last: $0.67);
--Sell (write) one $39 January put option (last: $1.93).
Note: These ideas would, in the event of a rally for the equity, reduce the trader's net basis by a total of $2.60, while in the event of a selloff, it would allow time for the trader to correct him or herself. The possibility exists that the trader will, by January, have tripled the long equity position (adding 200 shares at an average of $38 to the equity position), and then would have reduced that new net basis by another $0.86.
(A longer version of this column appeared at 7:49 a.m. ET on Real Money, our premium site for active traders. Click here to get great columns like this from Stephen "Sarge" Guilfoyle, Jim Cramer and other experts throughout the market day.)