Micron Technology (Nasdaq: MU) is set to release earnings on Wednesday, June 20 after the market close. Micron has been on an incredible run over the last two years with the stock gaining over 400%, but the sentiment toward the stock is a little concerning.
The rally in Micron has certainly been warranted. The company has seen its earnings grow by an average of 31 percent per year over the last three years with the last quarter showing growth of 213 percent. Analysts expect the earnings to grow by 133 percent for the current year.
Sales have also been growing, but not as fast as the earnings. The average sales growth over the last three years has been 13 percent and the most recent quarterly report showed growth of 58 percent.
The company sports a return on equity of 36.8 percent and a profit margin of 28.6 percent. All of these stats are impressive and thus the reason the rally is justified.
As far as past earnings reports, the company has a history of beating expectations. Each of the last four earnings reports has beaten consensus estimates anywhere from 3.3 percent to as much as 10.9 percent. The current consensus is for EPS of $3.12.
This is the beginning of why there are concerns heading in to the report. The consensus EPS number was $2.85 only 30 days ago, meaning that analysts have ramped up their expectations by 9.5 percent in the last 30 days. That is a sign of increasing optimism and it means the bar has been raised considerably.
In addition to ramped up expectations for the earnings report, the short interest ratio and the overall analysts’ ratings show excessive optimism as well. The short interest ratio is a meager 1.14 currently and that is after short interest rose from 57.8 million shares to 60.3 million in the past month. Even with the increase in short interest, it would only take short sellers a little over one day of average volume to cover their positions.
As far as the analyst ratings, there are currently 30 analysts following the company and 27 of them have the stock rated as a “buy”. The other three have the stock rated as a “hold”.
Between the jump in the EPS estimate, the low short interest ratio, and the analyst ratings, the optimism toward Micron is excessively bullish. When the sentiment is this bullishly skewed, it is almost impossible for the company to beat estimates by a wide enough margin to spur a post-earnings rally. If recent history tells us anything, the company will likely beat the EPS estimate. But with the sentiment being so bullish, beating the EPS estimate doesn’t mean the stock will jump.
In addition to the extreme bullish sentiment, the pattern in the chart is eerily similar to the company’s last earnings report. The blue circle on the chart shows the pattern while the arrow points to big drop that occurred the day after the earnings report in March. You can see how the stock ramped up to a new high, dropped a little, and rallied again before the earnings report. Then the stock dropped almost 20 percent in the two weeks following the report.
The current pattern shows a similar rally throughout May, dropping slightly, and then rallying for a week or so. The stock has dropped in recent days as it has been caught up in some of the tariff battle exchanges between the U.S. and China. But the tariffs will not have any impact on Wednesday’s report.
The bottom line is this—it is going to be very difficult for Micron to beat estimates by enough of a margin to drive the stock up immediately given all of the optimism toward the stock. The company’s fundamental performance and price action are really good, so shorting the stock wouldn’t be wise.
I like the idea of waiting until after the earnings report and then waiting a week or two to buy the stock at a better price. After the pullback from the last earnings report, the 10-week RSI dipped below the 50 level for only the third time in the last two years. If we see the same thing happen this time, I would look to buy Micron. All three times the 10-week RSI dipped below 50 in the last two years, it presented a great buying point in the stock.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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