Looking for value - case study on Micron

The following is a sharing on an approach to identifying market opportunities, and should not be regarded as a stock recommendation. Please do your own due diligence (DYODD) before making any investment decisions.

Micron Technology Inc. (MU)

One of my favourite early success stories when I began trading USD-denominated stocks is that of Micron Technology. I was no stranger this semiconductor company, as it is one of the major manufacturers of memory products (alongside Hynix, Crucial, Kingston and others) that I had come across back in the days when I was into DIY PC stuff.

It was around early 2016 when I first looked at Micron stock. I remember forming the quick impression that the stock was possibly undervalued, simply from its P/E ratio. I did not have the impression that it was a poorly-run company, and I felt that with memory-intensive products like mobile phones and other smart devices becoming increasingly proliferated globally, there was very little downside.

chart from Yahoo Finance

If you look at the above chart, you see evidence of the cyclical nature of the semiconductor industry. Read a bit more from online literature and forum discussions, and you'll appreciate how this is due to certain characteristics of this industry. During periods of strong demand, semiconductor firms are likely to undertake large capital-intensive investments to build new plants and increase production capacity. However, these take around a few years to materialise, and by then, the market conditions may have changed, leading to over-capacity and consequently depressed prices. The lagged response of new supply to meet (past) demand leads to the volatile cycles reflected in Micron's share price - think of what would happen if Uber's surge pricing worked like it did today, but that any additional cars deployed were only able to hit the roads 6 hours after the surge started, for whatever reason.

But in 2016, I looked ahead and found it hard to believe that the strong demand for memory products would abate. While mobile phone penetration could begin to taper, there were many new products (e.g. smart cars) that could easily take their place in terms of needing memory chips of various kinds. Yet things just looked lacklustre for Micron stock, so I probably thought to myself at that time, "how bad can it get?" and decided to start a position.

Here's a brief chronology, up to September 2017:

• February 2016: Entered at $11.30
• May 2016: MU went down even further, and I picked up more at $10.25 (you could say I was thinking of dollar-cost averaging, I honestly can't recall - but the sharp readers would pick up that I was actually 10% down from when I first entered at $11.30, and I was now putting more money into the position...)
• June 2016: Stock recovered to $13.85 and I sold. Watched in awe as the stock climbed thereafter
• May 2017: Felt left out of the game, re-entered at $27
• June 2017: Took profit at $32 (around 18% gain)
• July 2017: Re-entered around $29
• September 2017: Took profit at $35 (around 20% gain)

Today, the stock trades close to $60. I'm well aware that if I had stayed the course from when the stock was trading in the low teens, I would be looking at a 400% to 500% return. Instead, I merely picked up the 'scraps' along the way. But those were some helluva valuable scraps - giving me a few dozen times the return I would have gotten if I had left the money in a bank account, and still a few times better than the best CPF interest rate available.

I'm happy that I made money, but it's also apparent that my preference for taking profit quickly led to periods of time out of market during which I gave up significant gains while the money was sitting around probably earning next to zilch interest. Especially in a volatile market, there is an overwhelming tendency to trade rather than to invest. Trading is kind of exhilarating, but unless you can make your transactions with very low fees, the happiest person is probably going to be your broker. Also, if your portfolio comprises a more than a dozen stocks, it is next to impossible to keep up with all the market on-goings, unless one is doing this full-time.

Regardless of the time horizon of your investment (intra-day returns all the way to multi-decade) and how you end up executing it, I think there are certain core principles that the example above elucidates. I highlight what I think are the three key takeaways that can apply to any and every situation:

1. Understand the product you are investing in. In the internet age, there is an incredible amount of resources, opinions, reports and what-not around to absorb. Supplement that with your own experience and observations where possible. I started a position in Panera Bread because I frankly thought their offerings made a lot of sense for an increasingly health-conscious North American population with a moderate-to-high level of disposable income. (Too bad I didn't hold on until PNRA was acquired at a significant premium!)
2. Look for value... There are simple metrics like P/E ratio, Price-to-NAV etc. that can be used to compare across firms in the same industry. I previously applied this to American Airlines when it was trading at a steep discount to its competitors (despite a well-executed merger with US Airways), and that worked well - when Warren Buffett subsequently added to his position in AAL, I was happy to benefit from the positive externalities of his halo effect!
3. ...But only in good companies. The quote attributed to Buffett, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price" is self-explanatory.

In my experience, I have found it a lot easier to identify potential investment opportunities in US markets compared to those listed in Singapore, because the offerings in the latter are much more limited. Still, I think the principles above are pretty much universal, so I suggest that you bear them in mind the next time you gear up to make an investment decision!