One of the simplest ways to beat the market over the long term is to buy high-quality companies when those stocks are out of favor.
Notice I said simple -- but not easy.
That's because a low stock price usually coincides with negative near-term headlines -- perhaps an earnings miss, a cyclical downturn, or skepticism over a new product or acquisition. Yet if you can keep your eye on the big picture, investing in industry leaders amid temporary setbacks is a recipe for outsized returns.
Today, the stocks of these three leaders all look like opportunities.
Micron Technology
Micron Technology (MU 2.92%) operates in the boom-and-bust DRAM and NAND flash memory industry, and currently, the memory industry is in one of its worst downturns of all time. This has been primarily due to some worst-ever declines in sales of PCs and smartphones after the boom times of the pandemic. The PC market recorded a 30% shipment decline in the first quarter, and the smartphone industry also recorded its greatest-ever year-over-year decline, with first-quarter shipments dropping nearly 20% to the lowest levels since 2014.
Moreover, China just banned Micron memory chips for "mission critical" applications, which will probably take a bite out of Micron's server revenue there.
Yet while the near term may look dark, there are strong memory growth trends amid artificial intelligence (AI) applications and auto and industrial chips. The rush of orders for AI-related applications could help pull the industry out of the doldrums in the second half of the year, while auto and industrial chips should see consistent growth through this decade.
Moreover, Micron is one of only three major DRAM companies and one of only six major NAND flash players. With the DRAM industry so concentrated, all major players have recently adjusted their supply output, which should help balance the market soon. While the NAND flash market is in worse shape, flash competitors Western Digital (WDC 2.77%) and Japan's Kioxia are reportedly in "advanced talks" to perhaps consummate a merger. That would bring the NAND industry to just five players, with one being a less-advanced Chinese player unlikely to penetrate foreign markets.
Along with increased concentration, Micron now has leading technology, as the first memory company to mass-produce 1-beta DRAM and 232-layer NAND last year. Capitalizing on strong trends in AI, Micron just last week unveiled an ultra-fast RDIMM (registered dual in-line memory module) for advanced AI applications.
Still down more than one-third from its January 2022 highs, Micron's technology lead amid a concentrated industry makes it a buy ahead of an eventual memory industry recovery.
Image source: Getty Images.
Sea Limited
Southeast Asian e-commerce, fintech, and mobile gaming star Sea Limited (SE 0.05%) was in many ways the poster child for the pandemic boom. But things turned ugly last year, when stay-at-home trends reversed and interest rates surged. The stock fell nearly 90% from top to bottom and still trades more than 80% off its 2021 highs. After a bounce, the stock sold off again after its recent quarterly update, as earnings slightly missed expectations.
Still, it's hard to judge Sea on headline earnings alone, as it has three major divisions that are all differently contributing to results.
Last quarter, Sea's cash-cow gaming division continued to disappoint, with bookings down a stunning 44% and adjusted EBITDA down 47%. Apparently, people are still not paying as much for game extras on the free-to-play Free Fire, which was a pandemic hit but now seems to be waning.
However, gaming was still profitable. And perhaps more importantly, both Shopee and SeaMoney are now sustainably profitable as well, with each segment posting positive operating income for the second quarter in a row. Moreover, the post-pandemic period doesn't seem to be hurting e-commerce or digital banking demand as much, as Shopee managed to grow 46% relative to last year and SeaMoney grew an even greater 75%.
Now that it's sustainably profitable across all three of its businesses, I'd expect investors to take note of Shopee and SeaMoney as a greater determinant of Sea's overall value, with a potential turnaround in gaming a bonus if it happens. Either way, the stock seems far too cheap at less than 3 times sales, especially for the now-profitable market leader in e-commerce and fintech amid the high-growth economies of Southeast Asia and Brazil.
Chart Industries
In the industrial sector, Chart Industries (GTLS -1.32%) is a leader in sophisticated equipment for handling and storing industrial gases and liquids, from traditional oil and gas to newer and cleaner alternatives, such as hydrogen, biofuels and synthetic fuels, carbon dioxide, and liquified natural gas (LNG).
Chart was performing spectacularly through the bear market last year -- that is, right up until it made a large acquisition, which has since sent its price tumbling. The acquisition of Howden, a leader in industrial fans and blowers, seems to have been seen as value-destroying among investors, with the stock essentially cut in half since the acquisition was announced Nov. 9.
At first glance, that may seem justified. The $4.4 billion acquisition was quite large for Chart, which was trading at a market cap just over $8 billion at the time, and was made at a 12.9 enterprise value-to-EBITDA ratio, which is not exactly cheap. Even more concerning, Chart had to sell debt with high coupons between 7.5% and 9.5%, along with a small equity raise, to make the acquisition.
However, now that the stock has sold off, it looks as though the negative effects of debt and dilution are priced in. Moreover, the Howden acquisition looks to be a strategic home run. Management has claimed it will be able to reap cost synergies of $175 million in year one and $250 million by year three, as well as commercial (or cross-sell) opportunities of $150 million in year one and $350 million by year three. Thus far, those synergies are on track, and management has said there could be upside to those numbers as well.
The combined company should also be a powerhouse amid the renewable-energy transition. Management now sees the "energy transition" market including hydrogen, LNG, biofuels, water treatment and others making up 41% of revenue, and growing between 20% and 30% per year over the medium term. Moreover, Howden had a high portion of revenue coming from its aftermarket and service segment, which is highly stable and tied to the installed base of equipment. Chart management estimates that this portion of the business makes up 31% of revenue, and that it's projected to grow at a healthy 20% rate.
So more than 70% of Chart's business is projected for strong annualized growth, with the remaining traditional industrial markets set to grow in the mid-single digits. Management has also identified two specific divestitures that should lower the company's leverage this year.
The combination of high revenue growth, increasing profit synergies, and debt pay-down should eventually get Chart's stock moving back toward its former highs.
