Fiduciary Management Inc., an investment management firm, published its first quarter 2021 investor letter – a copy of which can be downloaded here. A return of 7.6% was reported by the FMI All Cap portfolios for the Q1 of 2021, outperforming both its Russell 3000 benchmark that delivered a 6.35% return, and the Russell 3000 Value Index that had an 11.89% gain in the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
Fiduciary Management, in their Q1 2021 investor letter, mentioned Micron Technology, Inc. (NASDAQ: MU) and shared their insights on the company. Micron Technology, Inc. is a Boise, Idaho-based semiconductor company that currently has a $101 billion market capitalization. Since the beginning of the year, MU delivered a 19.87% return, extending its 12-month gains to 97.94%. As of April 14, 2021, the stock closed at $90.67 per share.
Here is what Fiduciary Management has to say about Micron Technology, Inc. in their Q1 2021 investor letter:
“Micron Technology, founded in 1978 and headquartered in Boise, Idaho, is focused on the production of innovative memory and storage solutions. Approximately 70% of its revenue (85% of operating income) comes from dynamic random-access memory (DRAM) and 25% from “not and” (NAND) solid storage, and the balance from other emerging memory technologies. By broad market segment, 2020 sales were approximately 25% Mobile, 20% Client and Graphics, 20% Enterprise and Cloud Server, 20% Solid State Storage Devices, and 15% Automotive, Industrial, and Consumer.
Good Business
• Following decades of consolidation culminating in the acquisition of Elpida Memory Inc. (out of bankruptcy) by Micron in 2013, DRAM entered a new paradigm, where none of the remaining three large players were seeking to win material market share. By 2019, nearly all of the global DRAM market was controlled by Samsung Electronics Co. Ltd. (46%), SK Hynix Inc. (30%), and Micron (21%) because migrating process technology to the next “node” has become increasingly difficult and costly. Barriers to entry have never been higher and the DRAM industry may soon be entering an extended period of structural undersupply. In the NAND market, where Micron is #4 of 7 (soon to be 6), a similar dynamic is gradually playing out. Industry leader Samsung still intends on nearterm market share gains which may drive further consolidation.
• Demand growth remains strong because almost anywhere there is a processing unit, dynamic memory and storage are needed, and as performance increases, memory demand increases. While industry demand growth may come in part from memory being added to new devices, the larger driver will continue to be growth in memory per device, or “content per box.”
• PC DRAM and laptop NAND have been somewhat commoditized, but the end market demand for both is broadening. Micron is #1 in specialized DRAM for graphics, automotive, and networking. There are advantages to producing both DRAM and NAND, including shared research and development for other emerging and hybrid memory technologies.
• Full cycle margins have been rising, and the memory industry appears to be becoming somewhat less cyclical because of predictable supply growth trends. With this, we expect Micron will have greater full cycle margin than historically.
• As of 2019, Micron’s 5-year trailing ROIC was 18.3%.
• Micron’s balance sheet tipped into a net cash position just nine quarters ago and had net cash and investments of $2.5 billion for the fourth quarter of 2020. Once carrying significant net debt, the stock was upgraded to investment grade in recent years by both Moody’s and Standard & Poor’s.Valuation
• Micron trades for a high single-digit 2022 EPS estimate.
• While cyclicality remains a trait of Micron, we feel the multiple will be sustainably higher over the next five years due to the oligopolistic nature of the market and the strong secular demand.
• Micron is likely to institute a dividend within a year or two.Management
• Sanjay Mehrotra joined Micron as CEO in February 2017. On his watch, Micron has significantly closed the technology and cost gap versus Samsung. Mr. Mehrotra is focused on technological competitiveness, continuous cost reduction, capital expenditure discipline, and return on investment. He initiated the company’s first $10 billion buyback program in May 2018. He co-founded SanDisk Corp. in 1988 and was CEO when SanDisk was sold to Western Digital Corp. in 2016.
Investment Thesis
The global memory industry has structurally improved since 2013 due to consolidation, higher barriers to supply growth, and the ongoing broadening of demand. While not recently evident, industry cyclicality is diminishing. Following an extraordinary demand-led increase, DRAM prices surged in fiscal year 2017 and 2018 (hyperscale cloud data center buying), but receded drastically in 2019 and 2020 ended September 30. Prior to COVID, Micron was anticipating a fairly smooth calendar year 2020, but demand was pulled forward from datacenter buyers (work-from-home trends) and Chinese smartphone manufacturers, building inventory anticipating trade frictions. Though smartphone end-demand rebounded in the second half of 2020, these two factors created a demand hole for a few quarters. Looking forward, the DRAM industry appears headed for structural undersupply, which supports firming prices, rising margins, and significant earnings growth ahead.”
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Our calculations show that Micron Technology, Inc. (NASDAQ: MU) ranks 21st in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, Micron Technology, Inc. was in 100 hedge fund portfolios, compared to 79 funds in the third quarter. MU delivered a 10.37% return in the past 3 months.
The top 10 stocks among hedge funds returned 231.2% between 2015 and 2020, and outperformed the S&P 500 Index ETFs by more than 126 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Here you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
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Disclosure: None. This article is originally published at Insider Monkey.
