Finding your personal investment style – Memory
As promised this post will be about a detailed investment style analysis. I will follow the initial blog post so if you haven’t read it yet, give it a try. I will not explain any metrics or concepts in this post so if some concepts are new to you, have a look at my previous posts.
Investment decision flowchart
I will start of at stage 3 of my decision flowchart, shown in the initial investment style article. So I always have been a tech enthusiast. I love to build computers and recently I built one for a friend. Well actually that was a year ago but I recently build one for myself as well. Anyhow. Those of you who are into that kind of stuff know that the memory is normally one of the cheaper components when you build a computer.
However, currently the prices are way higher and depending on the components you use the memory can cost as much as the CPU (arguably the most important piece of a build). This got me thinking.
brief digression – Memory
To those of you who don’t know what memory is, let me give you a quick introduction. Memory is basically a kind of electrical storage for data, like a Hard drive disk. If you don’t know what that is, think of a USB-stick. The difference in those examples of storage and memory is the write and read time. Those basically give you the time necessary to store data on the storage/memory and the time necessary to read the data on the storage/memory. Memory is way faster in reading and writing and therefore way more expensive. However, those fast times are not always needed and that is the reason why we don’t have memory hard drives. Memory (in the case of a computer “RAM”) is often used in smartphones, computers or any electrical device with an operating system. Normally, whenever you start-up your computer, the necessary files for your operating system are transferred from your hard drive to your memory. The time necessary for this is reduced as the memory is fast and the operating system works flawless as it runs on a “quick” storage. This is a basic example but it should give you the necessary knowledge for memory and its use.
Memory and their price increase
So the price of the memory struck me as way higher than the times when I had been building computers. A few research minutes later my theory had proof. The memory prices have been steadily increasing. Why is that? Well it is quite simple. Nowadays there exist more and more “smart” devices. This will not change rather it will increase. I mean we got frickin’ robots as lawn mowers and they also run on some kind of operating system. Our smartphones grow more and more advanced and they also need memory. So will our intelligent microwave in a few years. From a supply & demand relationship it makes sense that memory will increase in price as the demand rises too.
So apparently we figured out a hypothesis for a specific industry: the memory industry. What now?
First of lets find out who are the company’s who produce memory or more specific RAM.
By googling “ram suppliers” I found that Micron, Crucial, Kingston, Sandisk and Transcend manufacture memory, to name a few. Wait a second. By looking at the respective Wikipedia article of each name you will see that many of them are the same or are owned by another cooperation. Micron owns Crucial for example (internal brand name). So I used finviz for my analysis as it is a really useful website and offers lots of data on for specific stocks. I only found Micron and Western Digital Corporation (Sandisk). As you might see, finviz also offers the feature of naming the industry the stock is in. For micron it says “memory chips” whereas for WDC it shows “Data storage devices”. Because my initial interest is in memory I will focus on Micron.
Evaluating the basics
So now we start of by looking at the basics. P/E ratio is @5.20 and therefore super low. Weird as micron is listed in the NASDAQ and therefore we expect something around 20 as the average currently is 22.60. The forward PE is even lower at 4.41. EPS is solid at 9.87. The market cap of the stock is @ $58.99 Mrd, so no penny stock – sweet. Price to book ratio is at 2.08. Not too high and therefore good. Income is $12.09 Mrd and therefore a fifth of their market cap – nice. Especially really neat because they have a profit margin of 43.40%. No dividend – not strange nowadays. EPS this year 137.30% – what the heck that’s crazy. Crazy good. They doubled the earnings per share this year. That means every share made double the profit compared to the year before. However, for the EPS next year they propose a -1.05% development. That is not good, apparently they expect to make less money per share compared to this year. Maybe a development from their rapid EPS growth this year? The beta is 1.65 and therefore we expect to see this stock move 1.65 points for every point movement of the market. Therefore this stock holds more systematic risk compared to the market and is theoretically 65% more volatile.
So all in all it sounds like a really nice (big market cap), strong (big income, good profit margin and high EPS) and undervalued (low PE, moderate PB) company from the metric side.
Evaluating the chart
Looking at the chart we see that Micron fell -7.36% in the last month, -0.87 in the last quarter and rose 24.93% year to date. The 52 week range goes from 26.85 to 64.66 and at the moment we are 20.55% away from the 52 week high. It traded 7.68% below the SMA 20 (simple moving average) @ the time I wrote this article. The SMA20 recently crossed the SMA 50 downwards signalling a downside trend, however, the SMA200 has not been crossed yet. There has been support around $53, however, this support has been broken downwards, also signalling a potential downside.
Now that we went through all the hassle – whats up? Is it a buy?
Well, I got no idea. I would need to look further into the sector and into the company. Especially the relative low PE is weird and therefore caution must be applied.
However, I actually found this stock roughly 1 year ago so I know whats going on so let me tell you. Basically there was a demand for memory that was higher than what was initially thought. Additionally the companies who produce memory are under investigation for price fixing. That means that they allegedly collaborated with competitors in order to raise the price of the memory in the market (which is illegal). To top that off the memory sector is cyclical. That means that the revenues will fluctuate strongly over the timeframe of several years. This kind of makes sense put together with the forward EPS being -1.05%.
These points CAN be the reason why such a profitable company has such a low multiplier. Be that as it may, the stock has been a profitable one if one had invested one year ago. I don’t do recommendations so I will not put one on here I just wanted to lay out the process of finding a potential stock for you.
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