After a long absence from the blog I finally found the opportunity to write a little bit. The reason I have been absent is because I have mainly dedicated all my time to my family, friends and to build my house. Since 2013 I have hardly found any interesting investments. The market since then did not seem cheap. Low interest rates helped to keep it up and advancing. In the past years I just sold a couple of small positions and shorted volatility via the VXX Etf, which is more like a permanent short on a product which I consider is designed to converge to 0. Nonetheless I have kept an eye on my portfolio and followed the market to make sure that the investments are still sound and to see if I spotted some opportunity. During that time of low activity the only company that I clearly found interesting was Micron Technology (MU). I have been following it since 4 or 5 months ago when I noticed that it was falling. I also noticed that investors such as David Einhorn and Seth Klarman were investing in it. Both at much higher prices than now. After a long fall and having studied it for some months I decided a few weeks ago that it was too cheap to let it pass. Therefore, between the 23rd and the 27th of September, I bought 265 stocks, most for me but also a bit for my smaller sons, at an average price of 14.51 and a Jan 2018 strike 10 call option for 6.2. I also bought 55 stocks for my oldest son, who is worried about making and saving money and lets me manage it. I dislike managing money for others, but I love my sons family and make an exception for them. I actually feel compelled to manage their money, at least as long as they cannot or will not do it themselves. Some of the reasons that I can think of why I like MU are the following:
- 1 - They provide a highly complicated technological products (ram and flash memory) which are very difficult to build by other participants and whose capital investments are enormous. That gives them a strong moat which tends to keep new competitors out and makes it a sustainable product for the long term.
- 2 - Memory is expanding and is projected to expand much more into the future. It is an essential for our current electronic civilization.
- 3 - The market is consolidating, there are less players than a few years ago and the buyers are fragmentizing, giving memory producers a higher negotiation power than what they traditionally had.
- 4 - New memory solutions such as 3dXpoint have a high chance of being successful.
- 5 - The stock is cheap and seems to have found a bottom. A Chinese company offered to buy it at a higher price than now, even though it will not happen it is an indication of a floor on the valuation. Few seem to have noticed that that same company bought afterwards a 15% stake in newly issued Western Digital shares. Western digital is also a competitor of MU in the memory space. Both produce storage products, the difference is that MU is oriented in flash storage for fast memory retrieval and Western Digital uses mechanical hard disk drives for slower memory retrieval.
- 6 - The management is buying stocks and retiring convertible debt, opportunistically profiting from the low prices of its shares. Capped calls bought to protect the potential dilution brought by their convertible debt limit the amount of dilution that they could eventually have. By reading the 10K you can find out that the amount of dilution is relatively small. The low stock prices are convenient since it gives the opportunity to buy back stock and retire convertible debt at cheap levels, at the same time those actions tend to put a floor on how much lower the stock can go.
- 7 - Micron Japan, the ex Elpida, a ram memory producer bought by Micron, is still in bankruptcy reorganization and Micron, has the obligation to pay its debt for the following 5 or 6 years. Once that is paid the amount of cash flow generated will be significantly higher. That does not seem to be taken into consideration in the current valuations and is also a catalyst that indicates much higher prices in the future.
- 8- Micron has been aggressively investing in buying competitors, what they could produce before 2012 is a fraction of their current output. It profited the long crash in ram memory to buy companies at cheap levels. By doing that they consolidated their industry and now there is much less competition than just a few years ago. The parallels between hard disk drive makers and ram/flash producers are interesting. Both started from a highly fragmented industry which consolidated through the years. In the case of Hard disk drive makers the consolidation has been even higher. In addition to Western Digital, only Toshiba and Seagate produce hard disk drives. In the case of ram memory there are around 5 producers, that is not as consolidated as hard disk drive makers, but the tendency is the same in both industries: they advance towards consolidation and that should bring price stabilization and less cyclicality.
- 9 - Few investors seem to understand or like semiconductors, there seems to be a strong negativity on MU at current levels. The main reason appears to be because ram memory prices are falling. Actually they have always fallen, but what matters is that costs fall as much or often more, keeping the margins healthy. I am leveraging my experience on having studied and invested in companies such as Intel, Western Digital, and Applied Materials. All those companies are on the same eco system as MU. Western Digital sells storage, as well as Micron. Intel produces, jointly with Micron flash products and have invested in the foundries together. Both Micron and Intel buy machines from Applied Materials to build their products. All my investments on Intel, Western Digital, Applied Materials and now Micron were done as a consequence of specializing on that sector more than any other. I feel on my comfort zone and tend therefore to spot opportunities on that sector. Taken together, my investments on that industry is my biggest one and will probably keep growing.
Best wishes !