Micron: A “Value” Technology Stock to 3X Your Money
In recent months, value stocks have become cheaper relative to growth stocks than they have been in more than 70 years.
The chart below tells the tale.
The top line is the price to earnings ratio of growth stocks, the bottom line is the price to earnings ratio of value stocks.
What the chart clearly shows is that the gap between growth and value has gotten very wide.
Does the widest valuation gap in 70 years mean that as investors we should be taking a hard look at value stocks today?
Yes! Yes, it does. And I’ve got the perfect stock in mind.
Interestingly, value stocks have actually outperformed growth stocks historically. Market data going back to 1965 shows that value stocks have beaten growth stocks by 2.7% annually. 1
Compounded over time this 2.7% is a huge difference.
This historical outperformance means that as investors, we should always have at least a slight preference for value stocks. And given the valuation gap that exists today, we should be prioritizing value stocks when looking for investment opportunities.
If you squint hard at the chart above, you will notice that in the late 1990s the valuation gap between growth and value was very nearly as wide as it is today.
Not coincidentally, the late 1990s was also the last time that investors could have locked in a decade of outperformance by purchasing value stocks.
The cycle has come around full circle again. And just like it was in the late 1990s, now is the time to buy value.
Micron Technology – There Is Cheap and Then There’s Crazy Cheap
So what exactly is a value stock?
It is a stock that trades at a low valuation relative to its financial fundamentals, such as earnings, sales, cash flow, EBITDA, or book value.
Today, you are going to be hard pressed to find a better value than Micron Technology (MU).
Here is the key valuation data on Micron:
- Price to Earnings ratio – 3.06 times
- Enterprise Value to EBITDA – 1.91 times
- Price to Book Value – 1.08 times
Those valuation numbers aren’t cheap, folks. They are absurdly cheap.
Usually I would only expect to see these kinds of valuation data points from barely profitable, heavily leveraged companies.
But that isn’t Micron. This company has an excellent balance sheet with more cash than debt and a long history of profitability.
If you aren’t familiar with the Micron business, let me get you up to speed.
Micron is a world class player in the global semiconductor business which is focused on the manufacturing of high-performance memory chips.
A memory chip is a semiconductor device that a computer uses for internal storage.
While you wouldn’t know it by Micron’s valuation, the long-term demand forecast for microchips is actually very bullish. Smart cars, smart communities, artificial intelligence, the Internet of Things (IoT) and cloud computing are all going to drive semiconductor demand going forward as countless devices require storage.
This is an industry with a long-term tailwind behind it.
The pessimism currently weighing on Micron’s share price is that we are currently in a cyclical downturn for the semiconductor industry — a point I don’t disagree with.
However, my opinion is that instead of focusing on what could be a slowdown in semiconductor sales that will last for a couple of quarters, investors should focus on the chart below.
My point being that yes, this is a cyclical business, but the long-term sales trend is very much up and to the right. And that trend is only going to get stronger going forward.
Trading today at book value, there is little (if any) downside in Micron’s shares.
And given that at the top of these cycles Micron has traded for up to three times book value, the upside is at least a three-bagger.
That is value, folks.
Low downside and lots of upside — a style that is soon to come back into vogue.
Here’s to looking through the windshield,
Financial Analyst, The Daily Edge