Poor Company Outlooks Usually Mark a Time to Buy, Not Sell

Analysts tend to run behind market events. Companies tend to see upgrades after a big move higher. And when a stock is falling, the downgrades will come in too late to protect investors from most of the drop.

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  • The same is true with companies reporting their outlook. When things look good, companies tend to overestimate their future returns. When markets sour, they tend to significantly underrate their future returns.

    Case in point? Micron Technology (MU). The memory maker is reporting a slowdown in tech hardware spending, months after a slowdown in the economy has already been under way. Shares will likely continue to trend lower in the coming weeks as analysts pile in downgrades.

    Action to take: With shares at a 52-week low, and down 30 percent over the past year, the stock is starting to look like a contrarian buy now.

    The company is coming off some strong operational returns in the past year, with earnings up 275 percent, but shares are incredibly cheap for a tech play at 5 times forward earnings. Buyers can also get a 0.7 percent yield now.

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  • For traders, the January $65 calls, last going for about $4.25, offer a return on a bounce higher in the coming months. Traders can likely buy a bit more cheaply in the coming weeks, and can even trade in and out of the position, as shares will likely be volatile as a tech play.


    Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.