Name That Trade – $MU Shoo

by Dan June 10, 2015 3:15 pm • Commentary

We have had our eye on MU in 2015. I last looked at it in mid May when the stock was $26.60 (read below). Despite some $50 billion in semiconductor m&a, and the Philadelphia Semiconductor Index (SOX) up a couple percent since (up 5% on the year) since, the stock is down 4.5%, and just yesterday making new 52 week lows, and down 28% on the year.

The next identifiable catalyst will be fiscal Q3 earnings (not scheduled yet) but should come in the last week of June (Bloomberg estimates June 23rd). To say that expectations are low is an understatement.

From purely a technical perspective, the two year chart of MU below shows the importance of the $25 level, which was a level the stock has a massive breakout from a little more than a year ago that resulted in further gains of 47% leading up to its December peak:

[caption id="attachment_54368" align="aligncenter" width="600"]MU 2 year chart from Bloomberg MU 2 year chart from Bloomberg[/caption]

Its really hard to argue with the notion that a break of $25 to the downside on fundamental news would cause at least a 10% drop, with little support until the low $20s.

The stock is a tough press on the short, down 28% on the year sitting on a key support level, but if I had a convicted bearish view that the company would miss and guide down in late June, I would buy the July 2nd weekly 25/23 put spread for 55 cents with the stock $25.35. This trade offers a break-even at 24.45, with gains up to 1.45 down to 23 and a max gain of 1.45 below.

I am hesitant to press here, and would likely look for a bounce, but with the stock acting the way it does on a massive up day today, that may never come.



Previous Post May 14th, 2015: Name That Trade – $MU Shoo

Last night on CNBC’s Fast Money we had a brief discussion about semiconductor stocks on the heels of Qualcomm’s (QCOM) $10 billion bond deal to fund its previously announced buyback. The feelings of the panelists were generally to stick with the large cap stocks like Intel (INTC) and Micron (MU) given their cheap valuation relative to the broad market.

I am hardpressed to find too many fundamental reasons to own semis at the moment, and the relative under-performance this year, after massive out-performance last year is a bit troubling. INTC is down almost 10% on the year and 14% from the multi-year highs made late last year. INTC’s nearly 3% dividend yield, massive share buyback and strong balance sheet make the stock kind of defensive. And in my mind, trading 15x 2015 earnings that are expected to decline, with a 1% expected sales decline does not look particularly compelling (read my current trade on the stock here).

As for MU, this is a stock that we have been short of the stock in put terms (read here), not currently positioned, but the stock has been on our radar for a re-entry on the short side. A few weeks back I debated a panelist on Fast Money who is long MU and thinks the stock is a bit overdone on the downside (it’s down 24% in 2015, and down 27% from the 15 year highs made last year.)

The three year chart below shows the stock again approaching fairly important technical support:

[caption id="attachment_53651" align="aligncenter" width="600"]MU 3 yr chart from Bloomberg MU 3 yr chart from Bloomberg[/caption]

While the stock is down 25% from the highs its also up 400% from the 3 year lows. We know where the stock should find resistance near term, but where is the support??

On a one year basis the weakness is a bit more pronounced, again approaching the 52 week lows with a now downward sloping 200 day moving average:

[caption id="attachment_53652" align="aligncenter" width="600"]MU 1yr chart from Bloomberg MU 1yr chart from Bloomberg[/caption]

Options prices are super cheap, with 30 day at the money implied vol at just below 30%, nearing the 52 week lows:

[caption id="attachment_53653" align="aligncenter" width="600"]MU 1yr chart of 30 day at the money IV from Bloomberg MU 1yr chart of 30 day at the money IV from Bloomberg[/caption]

The next identifiable event will be fiscal Q3 earnings that should come the last week of June (but not scheduled yet.) The stock acts like a negative pre-announcement is coming. [private]

Its easy to call MU a cheap stock trading at 8.5x earnings, but its important to highlight the fact that this is a company who’s products are massively commoditized, and the stock’s multiple reflects the lack of pricing power the company has.

What to do here? The stock is a tough press on the short side as playing for massive technical breaks in this bull market has not exactly been a take it to the bank strategy. We prefer to wait for a bounce, possibly back to the stock’s 50 day moving average for a short entry.