Micron and Fiat Have Doubled and are Still Cheap
Posted: May 31, 2018
May 29, 2018 (Maple Hill Syndicate) — Just because a stock has doubled doesn’t mean you’ve missed your chance to profit.
Amazon.com shares doubled in 2003 and have marched to a further 2,100 percent gain since. Micron Technology, Microsoft and many other stocks have scored handsome gains even after they doubled in a year.
To repeat one of my Sunday sermons, the way to judge a stock is not by whether it’s been rising or falling, but by how good a value it is now.
Here are a few stocks that have doubled in the past year, and that I think have potential to move on to meaningful further gains.
Memory chips are considered an unglamorous slice of the semiconductor industry. The sexiest part features specialized chips that help people play advanced video games and mine cryptocurrencies.
Nvidia Corp. (NVDA) epitomizes the latter. Micron Technology Inc. (MU) exemplifies the former. I think people forget that many of today’s mobile devices, including feature-rich mobile phones and tablets, use a lot of memory chips.
Over the past 12 months, Nvidia has advanced 77 percent and Micron 106 percent. I prefer Micron because its shares sell for 7 times recent earnings, versus a multiple of 42 for Nvidia. Micron’s return on stockholders’ equity was a sterling 51 percent, just a little less than Nvidia’s startlingly high 56 percent.
Fiat Chrysler Automobiles NV (FCAU) shares have doubled in the past year to almost $22. Yet they are modestly valued at eight times recent earnings and five times the earnings analysts expect in the next four quarters.
With Ford moving to abandon most passenger cars, Fiat Chrysler may be able to pick up some market share. While Fiat Chrysler has dramatically reduced its debt in recent years, to about 76 percent of stockholders’ equity, Ford’s debt towers at more than 400 percent of equity.
The company’s Ram pickup truck and Jeep Grand Cherokee are doing well, as are some of its high-end specialty vehicles.
Refining is a spread business. Refiners thrive when the spread widens between the price of gasoline (or heating oil or jet fuel) and the price of oil. It can be a feast or famine business, but at the moment it looks to me like the next 12 months may be a feast.
Demand for gasoline recently hit a record, and summer (peak driving season) hasn’t even begun yet. As for home heating oil, all I can say is that the past two winters have been abnormally warm. Global warming may cause that to be three in a row, but I still believe in reversion to the mean.
HollyFrontier Corp. (HFC) is one of the larger refiners, with a market value near $13 billion. Its stock has nearly tripled in the past year, going from around $25 to $72. Today’s price is 16 times earnings and 0.9 times revenue, which I suspect leaves room for additional gains.
I recently bought shares in Daqo New Energy Corp. for some of my clients with high risk tolerance. Based in Wanzhou, China, the company makes polysilicon for solar panels and silicon wafers for semiconductor chips.
In the past year, Daqo’s shares have ascended to more than $65 from about $21. The price is less than eight times earnings, which reflects both the cheapness of China’s stock market relative to the United States, and investors worry that the barriers to entry in Daqo’s business are low.
That’s a legitimate worry, but on balance I think this is a good speculation.
This is the 11th column I’ve written about stocks that have doubled but may still be good buys.
Of the previous 10 columns, seven have been profitable and six have beaten the Standard & Poor’s 500 index. The average 12-month gain on these recommendations has been 13.6 percent, compared with 11.9 percent for the Standard & Poor’s 500 Index over the same periods.
Last year’s crop did miserably. All three of the stocks I picked declined, with Maui Land & Pineapple Co. (MLP) and Sandridge Energy Inc. (SD) each down 30 percent or more. Cloud Peak Energy Inc. (CLD) dropped 7.3 percent On average, my picks lost 23.3 percent while the S&P 500 advanced 15.0 percent.
Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.
Disclosure: I own Micron shares personally and for most of my firm’s clients. A few clients own Nvidia. A private partnership I manage holds Daqo New Energy.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Mass., and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at email@example.com.