Micron Technology (NASDAQ:MU) was our biggest winner in 2014. Unfortunately, we overstayed our welcome and gave back much of those gains this year. The shares peaked at over $36 last December before collapsing to $14.98 on Sept. 30. Our thesis has been that Micron Technology’s primary product, DRAM, has consolidated to three players, who are likely to create more industry profits compared to when DRAM production was highly fragmented.
The problem is that structural industry improvement doesn’t make DRAM less cyclical. The large capital requirements force participants to make large investments in anticipation of future demand. If the industry overestimates demand, it still makes sense to operate at full capacity and oversupply ensues. This year, demand came up short, DRAM prices collapsed, and despite our concerns about PC demand, we missed the turn of the cycle. Those PC demand worries led us to sell LAM Research and Marvell Technology at good prices prior to a sell-off in each security and we shorted (and subsequently covered) Best Buy (NYSE:BBY), IBM (NYSE:IBM) and Intel (NASDAQ:INTC). Although all of these moves helped, we underestimated the extent of Micron Technology’s exposure to the PC demand shortfall. Continue Reading »