Shares of Micron (NASDAQ:) have been volatile, which is no surprise given the current landscape of the stock market right now. Take virtually any news headline and it’s easy to see its impact on the stock market.
The yield curve, slowing national economies like Germany, the market and currency implosion in Argentina and of course, the trade war, can all impact stocks. But the trade war is the big one for Micron stock because the conflict has a huge impact on semiconductor companies.
In the case of MU, sometimes the impact of the conflict is direct and other times it’s indirect. But if MU’s semi, memory and chip peers — like Applied Materials (NASDAQ:), Lam Research (NASDAQ:), Advanced Micro Devices (NASDAQ:) and Western Digital (NASDAQ:) — are struggling, there’s a good chance that MU stock will struggle too.
Moreover, supply/demand issues have weighed on memory manufacturers like MU as well. That’s why we’ve slowly seen estimates for MU’s top and bottom lines dwindle over the last nine months.
There has been optimism that MU and its peers have reached a bottom. If that’s the case, it would be quite a powerful positive catalyst for MU stock price.
Valuing Micron Stock
The one thing investors have always pounded the table on when it comes to MU is its low valuation. But that low valuation is there for a reason; specifically, MU operates in a boom-bust business cycle. When the climate is right, its sales and earnings surge. But when demand dries up or supply builds too much (or both), its earnings and revenue are hammered.
No one wants to pay an average price=earnings multiple for that, let alone a premium. Some analysts, however, have said that if Micron stock traded with the same multiple as the S&P 500, then MU stock price would be much higher than it is.
But modeling a price target on a stock based on the assumption that investors will dramatically raise its valuation is a fool’s game. That doesn’t happen often and when it does come to fruition, there’s no way of knowing what the final valuation will be. Investors really need to analyze each stock based on its own merit and history.
In Micron’s case, it has a low valuation, and that probably won’t change unless a modification of its underlying business alters its outlook. Analysts, on average, expect MU to generate earnings per share of $6.22 this year, leaving Micron valued at 6.75 times the average EPS estimate.
However, the average EPS estimate for 2020 is just $2.50. If the average estimates prove correct, MU’s EPS will sink 60% year-over-year in 2020, and MU stock is trading at 16.8 times its 2020 EPS. Moreover, the average estimates call for MU’s sales to fall 24% this year and another 15% in 2020.
The average estimates for 2020 may be too bearish, but that emphasizes exactly what we’re talking about: Micron’s business is too volatile to command a higher valuation.
Trading MU Stock
The wild swings of MU’s earnings and revenue are too much for many investors. For those who do want to buy Micron stock, perhaps it’s best to accumulate it when the news has worsened considerably and sell the shares when it seems like blue skies for MU.
On Tuesday, MU stock fired higher, briefly eclipsing $45. However, the prior resistance zone between $44 and $45 held it in check. It didn’t help that Micron’s 38.2% retracement level is near $44 as well, while its declining 20-day moving average was $43.11.
We have been highlighting this resistance zone for months now, and there’s currently a lot of resistance in this area.
The rhetoric about MU is improving, but investors are still pretty cautious on the name. Luckily for the owners of Micron stock, the charts have somewhat definitive levels.
Bulls either need to see Micron stock price overcome its resistance or get cheaper before buying Micron stock. Bulls who are waiting for the shares to overcome resistance should look for a close north of the $44-$45 zone. If that happens, MU stock can reach its July highs near $49.
Aggressive bulls waiting for MU to get cheaper may feel confident near $41. There, MU stock price will be near the 50% retracement level and the 50-day moving average, which is trending higher. Conservative bulls may wait for a correction down into the $39 area. There it will encounter prior support from July, as well as the 200-day moving average. Further, the 61.8% retracement level near $38 should help boost MU stock.
In either scenario, buyers need to use extreme caution below $38. If this level give way, MU can decline into the low- to mid-$30s.
Bret Kenwell is the manager and author of and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.