Micron: Tag Along with Einhorn

12/13/2013 7:00 am EST

Focus: STOCKS

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

I love hearing David Einhorn's latest ideas; he's known for his exhaustive research and convincing presentations, says Ian Wyatt, editor of Daily Profit.

At the Robin Hood Investor Conference last month in New York, Einhorn shared his latest recommendation to buy shares of Micron Technology (MU). He also sat down with CNBC to discuss the stock.

Now, I've made a lot of money over the past few years by investing alongside David Einhorn. Immediately after hearing his pitch on Micron, I bought some stock.

I figured, at the very least, it might be worth a quick trade. The stock is up 9% already. And I think there are good reasons that it could go much higher.

The Idaho-based company makes memory for electronic devices, including computers, servers, tablets, smartphones, and video game consoles. This memory is known as DRAM.

Historically, DRAM has been an incredibly competitive business with low profit margins. However, Einhorn argues that the business is undergoing a massive improvement.

That's because there has been significant consolidation in the industry, which shrank from seven suppliers in 2011, to just three today. Less competition gives DRAM makers, including Micron Technology, far better pricing power.

The latest quarterly results confirm improved margins. In the latest quarter, Micron reported EPS of $1.51. That's a vast improvement from the loss of 24 cents a share in the comparable quarter, one year earlier.

Einhorn thinks Micron will have EPS of $3.50 in 2014 and $4 in 2015. Those projections are roughly 70% above the consensus Wall Street estimate.

Now, Einhorn isn't the only hedge fund manager who's bullish on Micron. Goldman Sachs reports that Micron is a hedge fund favorite, with 82 funds owning the stock. During the third quarter, hedge fund ownership of the stock grew from 14% to 21% of the shares outstanding.

As a result of rising earnings estimates and aggressive buying, by the "smart money," Micron shares have been rising. The stock is up an impressive 229% in 2013.

Regardless of the big move, Micron Technology currently trades at 10 times the consensus Wall Street estimate for next year. That's a 40% discount to the S&P 500 index (SPX).

In a market where many stocks are fully priced, Micron Technology looks like a cheap stock with meaningful upside.

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