Micron, Foot Locker & Exco

Hey guys,

I follow WDC as my first pick over 20 months ago when starting value investing. The WDC articles and discussion on seeking alpha which has turned me onto Micron. WDC has been embroiled in some legal issues but I have started buying some in the money calls on big dips and making pretty good return.

I have also been doing in the money calls on Micron and First Solar before the last earnings and made killings on both.

I have a couple of long calls on MU already up 50% or more and I recently noticed that its operating income has finally put it in the acquirer's multiple large cap screener even though the stock price is up 300% in the last couple years or less. This company is a growth, value, and momentum play. Some people still arguing the industry is cyclic but with the cloud server storage requirements, new smartphones, growing affluence in India and China there should be good demand for some time. The market is still growing and may be expected to level and then slight slowdown in 2018 through 2019. I am riding this thing for at least 3-6 months or more but interesting play. Currently at 43.70, price target consensus is around 51-52. I think it can hit 50 plus easily after next earnings call as they keep beating estimates and spot price price for memory keeps increasing as supply is constrained. Just a warning this thing is volatile and I would only try to get in on a pull back, seems to have just formed a new range. It may not be for the faint of heart as it regularly swings more than 2% in a day.

I also have been looking at Footlocker recently as it is very cheap. Sales declined something like 3.5% yoy and the share price took like more than 50% punishment. Seems oversold and I am taking a good look at this. Their margins may be squeezed a bit going forward but I think they still have a fairly competitive advantage due to brand recognition, prevalence, supply chain, volume buying power etc. I will keep looking and might move in at some point. Will have to dig a bit deeper, I think the drop might be related to nike for some reason.


I also really like Exco technologies for those in Canada, trades in the US also but pretty low volume. I picked up 100 shares and may add to the position. The operate in Canada, US, and Mexico. Current ratios seem a little tight but otherwise pretty strong balance sheet with good long term growth numbers from increased production and acquisitions. The headwinds they face right now are from NAFTA and some thinking that the auto market has peaked in 2016 but other areas of the economy all still seem to be very strong. This is not a really deep value pick but a very solid company in my books with a 3% dividend as well and great long term growth in revenue, book value and free cash flow.

I am curious what peoples opinions are about the stocks mentioned and if they have any other exciting picks.

Cheers,
Girish

Comments

  • edited November 2017
    About FL...looks cheap but it is a business model extremely cyclical...their margin over the years swing a lot and now they are historically very high...
  • Good call on FL. Classic buy on bad news. I was too afraid to pull the trigger.
  • Thanks,

    I never picked up any shares but it seemed like a decent price to move in. Seems to have gone up 60 percent since then. Wish I picked up some at the money long calls.

    I have been riding the MU and WDC roller coaster, it has been tumultuous. MU has been range bound for a while but should still be good value below 43. I had a couple of MU calls up 130% in my small margin account then crashed, I could have realized a 90% gain in my account if I sold. Too greedy I was. Still in the money and coming back., they expire in 30 days. My small US margin account returned 30% in 6 months.

    Some analysts at MS sent the semi stocks spiralling but they seem to be gaining their momentum again as fears of peak memory prices and low growth wane. Market has good life to it so far this year after the December tax selling.

    Things I learned so far with options strategies

    -If you can afford it, sell naked puts cash covered on stock you like that seem fair or a little over priced. Works best when implied volatility is high so you collect more premium

    -If you are buying calls try to get something in the money, they are more expensive but the more intrinsic value you get and higher probability of success. Also you actually get a discount the deeper in the money you go the less they cost per dollar of share price. Also make sure you buy with enough time to expiry so that you don't have to be right on direction right away. At least 1-2 months out but I like longer like 4-6 months. Out of the money calls are more like lottery tickets. Unless you have some deep knowledge of an industry or trend out of the money is a lot more speculative.

    -Make sure you have lots of volume, and narrow bid ask spreads. Makes entering and exiting easier.

    -Use some technical analysis to help pick entry points. If you follow a stock a lot you will have your own sense of what it's worth and when it is in the low or high side of its range or if it breaks out.


    I use limit orders and no stop loss although this may not be recommended. With buying calls your down side is limited to option price. Keep each position at 2-5 percent of your portfolio. With selling puts your risk is unlimited until the stock hits zero, that is why you only use this strategy with stocks you want to own and you feel have limited downside with long term upside like value stocks.

    These are both bullish directional strategies. Selling puts maybe is better if you have the funds because worst case scenario you buy a stock you want to own for a price your willing to pay. It is like getting paid to put in a limit order.

    Do understand that with buying calls you are at the whim of greater market, economic and world factors. Also note that there are people who affect stock pricing in order protect or gain more money from the sale of options. These are the market makers ;) that is why being long in the money helps. Likewise algo trading can shift direction of stock prices quickly in the short term as they try to undercut bid ask.

    I have heard buying puts can be slightly cheaper than buying calls. Also can be used to hedge a position or short a stock with limited risk. I have not used these strategies yet although the idea of buying some puts on peaking stock prices that I am bearish on seems pretty low risk.

    There are many option combinations with defined risk to reward profile but I believe you need slightly larger accounts as the positions cost more and can be harder to set up. But this would be a way to make money when the market is neutral. Spreads may be simple strategies to use like this but so far I have just been emploring single sided trades.


    Most of my other portfolio is diversified value in a tax sheltered account with average 15% returns on equity holdings over the last 12 months. Slightly below the S&P but I don't invest in oil companies or really expensive large caps.


    Still like exco and even showed good support after a recent bad earnings.

    Acadian timber, transalta renewables and corus entertainment all decent Canadian high dividend stocks if you have an appetite for uncertainty. Acadian the safest then Transalta, Corus the least safe. Don't expect too much capital appreciation but pretty safe divi. Does anyone here use a small portion of their margin to buy dividend stock? In Canada I can get a dividend tax credit on Canadian companies and claim any interest expense so it pays for itself and capital appreciation is free. I am in a lower tax bracket however so probably not as suitable for people with high income.

    Does anyone invest in BDC's? I hold HRZN as my main holding in my US margin account. Maybe not the safest but I feel comfortable with it. Be interested to know what others think of BDC structured companies.

    Sorry for the rant, just like to share some of the option info I have learned. Trying to gain strategies to build wealth and become financially independent for the future.
  • Whoa! That's a load of information. Thx but I don't think I will ever use options.
  • ExtremeAthlete, you might be making a mistake by completely ruling out options.
    I can't be sure why you don't think you will ever use options but there are very legitimate uses for every kind of investor/trader. Buying options was made for speculators. Selling options was made for those who wish to mitigate risk.
    In times of high volatility (when the premium is higher due to higher expected stock movement) it simply makes sense to sell options.
    You'd be doing yourself a disservice not to at least understand options and when considering entering a position or exiting a position (or sometimes when just holding a stock) at least see how you either increase your returns or lower your risk via options.
    If you're interested in at least learning more, The intelligent option investor is a decent starting point.
  • Jakerf,

    Thx for the recommendation. I'll definitely read it.
  • Ghazel, I recently discovered Exco . Corus has a high dividend payout ratio right now of 118%, Acadian has a high P/CF of 18.6 and TransAlta has a really high P/E of 113.
  • Exco looks great. Same as Linamar. Problem is both are related to the automotive industry.
  • Hey Davidlewis,

    Corus has a very high payout ratio but it is more than covered by their cash flow. After missing sales 3% and earnings 7% the stock sold off 30%. Overreaction in my opinion and a buying opportunity. The industry of the company is not a great place to be but still trading well below book value. They are paying down debt slowly.

    Transalta renewables has just finished a new natural gas power project in Australia along with pipelines. There was a contract issue with one of their customers for the new plant last fall but that is only for a small amount of the new output. The company has very strong balance sheet and revenue almost double in 5 years. Their revenue and cash flow should improve going forward. Only issue is a major stakeholder Transalta Power is a transitioning company that is suffering major growing pains as it switches from coal. I think this major owner is putting pressure on RNW to increase the dividend to help the parent with the cash flows. Forward PE is much lower 12 on morningstar but I am not sure as each site has different ratios. If you look at the company's cash flow statement I think they are great capital allocators along with a very under leveraged balance sheet. This is one stock I have owned for a few years.

    Acadian timber is selling close to book value. It is in the warren buffett screener. I have owned it for a few years. It has a company goal of having a 90% targeted payout ratio. This obviously hurts the cash flow but it is a very good dividend stock. It operates in Canada and the US and is not subject to such strong tariffs as other western Canadian lumber producers. Also Brookfield Asset management is a 20-30 percent shareholder and is able to finance further expansion as needed so decent security for the company. The company has a very low growth profile but if you buy it on the dips the 5.5%-6% dividend is very safe and maybe 2-3% growth per year. I will take that on what I consider a sound company.


    Maybe I am biased, interest rate hikes will hurt a lot of stocks going forward. Having some insurance and bank stocks and consumer staples can help in balancing out the portfolio. I am definitely over exposed to energy and tech but feel pretty diversified.
  • I'm short MU via puts expiring in 2020.
    Logic is basically massive Samsung, Hynix and Chinese capex in both DRAM and NAND. These should start hitting the market in 2019.
  • Hey Jiangyaokai,

    Thanks for your input, I agree that the Chinese fabrication expansion is real. I believe Microns former business partner Intel is trying to get into a piece of the memory fab in china as well. It should be an issue in the future but from what I have heard these fab's won't be online until mid to late 2019. I agree the risk is real for the memory market but feel strongly about the management, IP and development of Micron. Unfortunately some of those asian produces have better margins already but I believe Micron is slowly increasing market share. On top of that demand has held up quite strong and prices have stayed relatively level while margins are improving with current productions. Also I think micron is trying to get more into auto memory components and more niche markets.

    I would be interest to know what your strike price and cost is to understand your pricing probability or is this more of a long bet. Because even now the company has a 2018 full year PE of 4 so it is already quite heavily discounted. I am running two calls at the moment. An April 20, 38 dollar call I got for about 4.50 and a Jan 2019, 37 dollar call i got for 11.

    Cheers,

    Also interesting to hear Tobias talk about MU in this weeks mastermind group.
  • Also of note, I do not know that much about the Asian memory producers but what sort of IP does Hynix have especially in the SSD? They made a big push to get in to the bane led Pangea consortium bid for equity stake in Toshibas memory fab with WDC. Mind you tosh owns the plant but I believe WDC owns a lot of the IP from it’s Sandisk acquisition. Also with the newer equity offering and amazing performance of the memory market Toshiba should have enough capital to avoid delisting on Mar 31st. After this date Toshiba can back out of the agreement no strings attached if it has not settled regulatory hurdles and closed by then. This would make sense for Toshiba as I believe they want to maintain all income from their most profitable asset. Where does this leave Hynix if the Pangea consortium does not close. Also Chinese regulators are actually the ones holding this up due to trust issues with more consolidation in the semiconductor industry. China wants To develop its own memory due to high cost and constrained supple but are forced to partner, unfortunately they don’t have the technology from what I can tell. Another issue is China is its own animal when it comes to intellectual property rights, patents copyrights etc. Some companies would be hesitant to produce the latest tech there if the can’t protect their property so it may always be one step behind with the new production. I think Korea, Japan, and America still have the advantage and maybe taiwan in 4th. Definitely Samsung still has dominant market share.
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