Top Hedge Fund Stock Offers 100% Upside

Billionaire David Einhorn of Greenlight Capital believes we are in the middle of the second tech bubble in 15 years. Couple that with the selloff of momentum stocks last month, and investors are rushing to dump their tech stocks. But investors have been so busy selling that they are overlooking the buying opportunities among cheap tech stocks.
In Einhorn’s quarterly letter, he notes that the market should be valuing tech companies on earnings, rather than sales and addressable market.
Fortunately for investors, there are still tech stocks that generate positive earnings and are cheap from a valuation standpoint. Micron Technology (NASDAQ:MU) is one of the cheapest tech stocks around. It has also proven to be one of the best investments in the tech space over the last few years.
Einhorn highlighted Micron last December at the Robin Hood Investor Conference. That put Micron on our and we profiled Micron as the top hedge fund pick with 75% upside. Shares of Micron are already up over 20% since our article, but the investment firm, Drexel Hamilton, came out last week and upped its price target to $50. That means this top hedge fund stock offers 100% upside.

Micron Technology:  Still A Top Hedge Fund 

Einhorn noted in his recent letter to shareholders that Micron is still one of Greenlight Capital’s top five holdings. At the end of 2013, Greenlight Capital owned over 47 million shares. Alongside Greenlight was fellow billionaire Seth Klarman and The Baupost Group, owning 51.6 million shares. Each hedge fund owned roughly 5% of Micron.
When we first highlighted Micron, shares were trading at 10 times Wall Street’s earnings estimates for next year. Now it’s trading at only 8.6 times next year’s earnings estimates. Compare that to Micron’s top NAND memory competitor, SanDisk Corp. (NASDAQ:SNDK), which trades at a P/E ratio of 13.3 based on next year’s earnings estimates.
Micron is even cheaper now, than when we highlighted the company in December, despite the fact that shares are up over 20%. As we in our previous article, Einhorn thinks shares of Micron are even cheaper than what investors are seeing, based on his earnings estimates of $4 a share for 2015 (compared to Wall Street’s estimate of $3.04). Assuming that Einhorn believes Micron should trade at 10 times earnings, his target would be $40 for fiscal 2015 (ending August). That’s over 50% upside in just over a year.
The industry has changed for the better.
Micron had underperformed the market for nearly a decade, with shares trading below $5 just a few years ago. Its miraculous turnaround has been driven, in large part, by the rationalization of the memory supply industry. Earlier this decade, memory supply outpaced demand, creating excess capacity that the market was unable to absorb.
But industry consolidation has helped bring supply in check. Now there are only four NAND manufacturers and three DRAM manufacturers. Micron believes that DRAM supply will grow between 20% and 30% annually over the next five years, which is right in line with its demand growth expectations.
At the core of Drexel Hamilton’s thesis is the belief that DRAM prices will keep rising over the next few years given the new supply/demand balance. This more rationale industry should set the stage for continued revenue and earnings growth. It will also drive margin expansion.
Currently, Micron’s NAND operating margin is below Samsung’s. However, Micron could gain ground as it doesn’t have to pay any royalties to SanDisk, which Samsung does. An improvement in Micron’s margins will boost earnings and also give the market a reason to award it with a higher P/E ratio. However, shares are still attractive when looking at the company from a growth at a reasonable price standpoint. Its P/E to growth (PEG) ratio is a mere 0.8.
Shares of Micron tripled in 2013, but its earnings potential suggests the stock is still very cheap. Micron is now more profitable and more stable than just a few years ago. It might be ambitious to say that Micron can triple its stock price again in 2014, but it does appear that everything is coming together for a doubling.

The One Stock to Own in 2014 — The Year Mobile Takes Over

On Dec. 31, something incredible happened. For the first time in history, the majority of Internet traffic originated from NOT from PCs or desktops — but from mobile devices including smartphones and tablets. We’re never going back. Mobile is taking over. And even though the biggest player in mobile, Apple, is selling over 200 million iPhones this year alone… here at Wyatt Research, we’re recommending the one company no one is taking about. The one reaping massive profits each time a new Apple or Samsung smartphone is activated. In fact, as mobile data usage explodes in the year ahead, its stock is set to soar! Shares are already on the move. So, before this stock moves any higher, read our latest report for all the details: Click here for the full story.