Equity markets have suffered a full recession this year, and the bulls are still struggling to find footing. They have had strong days, but not in sequence long enough to make a difference. Therefore the algo behavior has been consistently selling rallies. As a result, theNasdaqhas now corrected 31% off of its highs. Today we will discuss three opportunities that have come to life among the chip stocks posse. They make a good bit of the Nasdaq index, so there are bargains among them.
But first we have to acknowledge the risk from the macroeconomic conditions. Even though the correction has been harsh so far, there’s still plenty of potential downside to go. The Nasdaq, for example, is still 19% above the 2020 January highs. Those highs quickly vanished. This is to say that some bargains may actually still be bull traps. Therefore careful consideration is necessary to find the real ones.
There are many segments among the chip stocks, and I varied my choices among them. Narrowing the list down to a worthy few is a tough task, so I know I wasn’t perfect. There are other companies that deserve to be on here that I omitted. The logic I used would allow you to expand the list to include your favorite chip stocks.
I’m focusing first on quality, because I want to eliminate all intrinsic questions. This keeps me from having to focus on external risks. Second, I’m looking for stocks that have fallen far enough to have technical support readily available.
Micron (MU)
The underlying thesis behind investing in chip stocks is that the world is going digital. This is a trend that started decades ago, but it has accelerated exponentially in the last three years. The urgency to go online has created a wave to sustain businesses likeMicron(NASDAQ:MU). Mu stock has been a star before, but has failed to crack into the three digits. The trend is proper enough to forecast more upside in the long term.
Its last attempt at $100 per share ended this year $1.55 short. Since then, MU stock has lost 44% of its value. It is now at a place of balance near January 2020 levels. These are lines that were in play two years prior. Such pivotal zones usually provide support for stocks on the way down.
Support does not always translate into an absolute floor, so we should consider the potential for lower prices. When the micro-economic conditions are this iffy, taking partial positions at first makes total sense. The fundamental metrics for Micron are impressive enough to eliminate risks of management flubs. I would like to see more improvement in net income since growth is tepid.
Nevertheless, last year the company generated $12.5 billion in cash from continuing operations. That’s pretty close to the peak of 2018. In other words, management is doing a better job in tougher conditions. Those are votes of confidence in my book. For this reason, MU deserves to be among the chip stocks to buy on this dip.
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