Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
Friday's surge on the back of a strong employment report didn't prevent stocks from breaking an eight week winning streak -- but it was close. On the week, the S&P 500 lost less than four hundreds of a percentage point, while the narrower, price-weighted Dow Jones Industrial Average (^DJI 0.50%) fell 0.4%. However, three large-cap stocks -- Intel (INTC -1.03%), Micron Technology (MU -3.03%) and Newmont Mining (NEM 1.56%) -- made big moves this week (the green line represents the S&P 500):
Dow component Intel (+4.1%) benefited from two upgrades to Buy this week, from Citigroup and Drexel Hamilton, with revised price targets of $28 and $30, respectively. JPMorgan Chase isn't as optimistic and chose instead to reiterate its "neutral" rating with a $20 target, with the following justification:
Intel is trading at 13 times calendar 2014 earnings per share, a premium to its peers. We remain Neutral as we believe the stock will be driven by the PC market at the current valuation. We are maintaining our December 2014 price target of $20.00, or 11 times estimated calendar 2014 EPS, in line with Intel's peers.
However, all three analysts agree that PC demand appears to be stabilizing and Intel has set the bar low with its 2014 guidance. Even JPMorgan leaves the door open for an upside surprise in its Dec. 4 report:
We believe the company has set the bar low enough that if PCs are flattish year-over-year in 2014, Intel's guidance is beatable. Despite signs of stabilization, there are not enough data points for us to become convinced the PC space has bottomed. However, if we continue to see positive data points on the PC end-market, our view could change.
I'm somewhere between these two camps: Intel looks roughly fairly valued at current prices, but I'd require a margin of safety to buy the shares, particularly given the uncertainty relating to the decline in the PC market.
Shares of another semiconductor company, Micron Technology (+5.7%), also got a lift from a broker on Tuesday, when Needham & Co. initiated coverage of the company with a "buy" rating and a $30 price target (the shares closed at $22.31 on Friday). Although the stock has already more than tripled, Needham's Rajvindra Gill believes it still has upside, noting that the forward P/E multiple "has actually contracted 44% from ~16x in July to ~9x today."
Last month, David Einhorn, a respected value-oriented hedge fund manager, called Micron his "new best idea," calling it one of the survivors in the market for memory chips and citing "an enormous change going on [in DRAM]" – specifically, industry consolidation (which typically improves pricing power.) Needham's Gill did not overlook this in his note:
With three players controlling ~95% of the market, we believe we are entering a period of rationality that will focus on return on investment capital as opposed to market share or survival. In past cycles, we believe MU's P/E multiple had reached a ceiling because one assumed excess supply was eventually coming online and pricing would crash. However, we contend that year-over-year supply growth in DRAM will be structurally lower than it has been in the past.
While the industry dynamics may be more favorable than they have been historically, I would caution investors against investing in a highly cyclical business like Micron. At less than 10 times the next 12 months' earnings-per-share estimate, the shares may look very tempting, but as Gill noted, "it's difficult to utilize historical valuation multiples for MU given that earnings have been so volatile." I would add that the same difficulty applies to the use of the current multiple.
While Intel and Micron Technology had a banner week in the stock market, shares of Newmont Mining got pummeled (-7.2%), ostensibly on the news that the company is selling its Nevada Midas underground operation and mill complex, citing its "ongoing commitment to optimizing our portfolio, as we continue to focus on our longer-life and lower cost core assets."
Last month, Newmont reported adjusted earnings-per-share for the third quarter that were down by some 46% year-on-year -- which happens to be roughly consistent with the year-to-date stock price performance, down 49% as of Friday's close. Newmont is not the only gold-mining stock to have performed poorly this year; the sector has been savaged. That attracted the attention of the Financial Times' John Authers, who has a value-oriented approach to investing. But after looking at the sector, he concluded in a piece that ran last Wednesday:
Mr Holmes [Frank Holmes, US Global Investors' chief investment officer] admits that gold stocks will probably only rebound once managements can show that they have cut costs and begun to improve cash flows – a point that may well come next year. But after such spectacular falls, and even backed by gold itself, gold mines look like value traps for now.
I'm inclined to agree with him; investors should tread carefully.
