Going Long Micron & Shorting Newmont

I released two pieces of content yesterday, one on Micron (NASDAQ:MU) and one on Newmont Mining (NYSE:NEM). With relation to Micron, I’m bullish on the stock for a number of reasons. Firstly, I like the company’s fundamentals regarding its DRAM product pipeline. We have seen acquisitions in this area. We have seen consolidation in this space and that over time will increase Micron’s market share despite DRAM prices continuing to go lower. Furthermore, if Micron can transform itself quicker than prices are dropping in this sector, then I believe its stock will rise, and that’s what investors are missing.

Micron, for example is at present manufacturing its 20 NM node and wants also to bring its new 1 NM node out before the competition. These are initiatives that could easily reprice the stock far higher. The market just needs a reason to see future robust earnings growth which we haven’t seen over the last few quarters. But if the market can envisage this because of the initiatives Micron is developing, then this stock could go far higher than $10 per share.

On another note I believe the NASDAQ (INDEXNASDAQ:.IXIC) has bottomed. It has completed its 7 year cycle low and now all I’m waiting for is for this index to break out to new highs. Once it does I feel that higher prices are ahead for the NASDAQ as I can’t see this index Topping for at least 2 or 3 years. Now, in the recent past Micron and the NASDAQ have been going in opposite directions. Now, I can’t see this continuing because sooner or later you’ll going to get value investors looking at Micron’s fundamentals and valuation and they’re going to start scaling into the stock especially if it keeps trading at depressed levels. Therefore, this is definitely another tailwind along with its present evaluation where its earnings multiple is less than 10 and far lower than the industry average. I would recommend buying the stock and holding it until at least the new cycle in this industry begins. This sector is very cyclical and we are definitely at the lows or are approaching the lows at present. I do not see much more downside risk to Micron.

With regards to Newmont Mining, I released a piece of content yesterday that recommended shorting the stock from these levels. Why? Well, the mining company is stretched way too far above its 200 day moving average for my liking. If you look at the long term chart of Newmont, you can see that the stock has always reverted to its mean. It has always reverted to its 200 day moving average and I don’t think this time will be any different. Sentiment levels are near nosebleed levels, and again this is another indicator that we are approaching a top so I would be very cautious getting long this stock at the present price. If there is one thing that I’ve learned in trading, it is that you have to be able to pull the trigger when you’re afraid. And, you know, when you see a stock repeatedly going up, day after day after day, it can be very difficult at times to pull the trigger but that is exactly when you should be pulling the trigger. Newmont will come back and revert to its mean and I would be confident that in 6 to 8 weeks time, Newmont will be at least trading in the 20’s and definitely not in the 30’s.

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With regards to its fundamentals, its production pipeline looks good for the next year or two but I don’t see much production potential or growth potential after 2017. It does have some development projects that will offset some of its ageing mines but I don’t think they’re going to offset them to the extent that the company is going to reach 5.5 or 6 million ounces in production within the next few years. I just don’t see that on the horizon. When an asset class, you know, finds an intermediate bottom, sometimes the market prices in future gains in the mining stocks. Therefore, that’s what investors have to extrapolate. The questions remains, are future gains in gold already priced into Newmont stock?

I think they are to an extent because the stock has outperformed mining indices such as the (NYSE:GDX) ETF over the last few months. If you don’t want to short the stock straight out, what you could do is just sell a call spread out the money. At the moment the stock is trading for about 35.41 so you could sell maybe the 37-39 or 38-40 call spread (45 days out) as this is a far less riskier play than shorting the stock outright. What it does do is it limits your risk and it defines your risk. So if your call spread is going to be $3 wide, you should be looking to collect about $1 in premium and just keep on selling those spreads out the money. At the moment the IV rank is about 50 so there’s plenty of option premium in Newmont. Also, there are no earnings coming up so that doesn’t interfere with volatility and option premium

To The Top!

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