Two cyclicals to avoid – Micron Technology and SK Hynix; A first look at WD-40; Chris Hohn's hedge fund made a record $18.9 billion last year
1) In yesterday's e-mail, I wrote about the perils of investing in cyclical companies and stocks. I used Titan Machinery (TITN) as an example, which has been hit hard by the downturn in the agricultural sector.
My main point was that the worst time to invest in a cyclical stock is when it looks the cheapest – aka when its price-to-earnings (P/E) multiple is the lowest. That's when earnings may be at a cyclical peak and about to collapse, which is exactly what happened to Titan.
Today, I'd like to discuss two current examples of such stocks: American chipmaker Micron Technology (MU) and Korean chipmaker SK Hynix (000660.KS).
Along with Samsung Electronics (005930.KS), they form an oligopoly making DRAM chips, which have seen exploding demand thanks to the AI-driven data-center boom.
This has resulted in soaring stock prices for Micron and SK Hynix:
As you can see in the chart, these stocks didn't move much over the past 10 years – until they took off and went parabolic since last April.
Normally when you see a chart like this, you'd think the P/E multiples would have also exploded, maybe even to triple digits...
But even after its huge run-up, Micron trades at only 11.7 times this year's consensus analysts' earnings estimates and 9.2 times next year's. The same figures for SK Hynix are an even lower 7 times and 5.9 times, respectively.
How is this possible? Simple: Earnings – and future earnings estimates – have risen even faster than their stock prices.
For example, Micron's earnings per share were a paltry $1.30 in 2024. But they jumped nearly sevenfold to $8.29 last year. And analysts expect $33.20 this year and $42.38 next year. Now that's some earnings growth!
So, earnings are exploding, yet the multiple on the stock is less than half that of the S&P 500 Index. You might be thinking, "Let's buy!"
Not so fast...
While I'm a big believer in AI (as I've discussed in many previous e-mails), I'm very concerned that AI spending is in a bubble (as I'll discuss in upcoming e-mails). And if there's a pullback, two of the first companies – and stocks – to get whacked will be Micron and SK Hynix.
To be clear, I would never short these stocks – they could both easily double again in no time. But I wouldn't buy them here, as there's too high a risk that they've been caught up in a bubble that could burst at any moment.
But what if I owned them and was sitting on big profits? That's a tough one because, as I've written many times before, you need to let your winners run.
So that's what I would do... but with a series of stop losses to make sure I didn't give back all of my gains.
2) Last week, at the ICR Conference in Orlando, I saw a presentation by the management of WD-40 (WDFC), maker of the ubiquitous lubricant spray.
This is a stock I've always wanted to own, going back 25 years, but it always seemed too expensive. I missed one of the greatest compounders of all time, as you can see in this 40-year stock chart:
But now the stock is back to where it was six years ago. So might it be a buy?
Taking a quick look at the financials, the company has continued to grow revenues and profits nicely:
So why has the stock gone nowhere in six years? In a word, valuation...
After trading between 15 times and 20 times forward earnings for more than a decade, investors slowly bid up the stock's multiple starting in 2013.
At the peak of the meme-stock mania in early 2021, its P/E ratio was more than 60 times next-12-months' earnings, as you can see in this chart:
Since then, the multiple has been cut in half to 31 times today. And it's important not to anchor on the absurd level it reached five years ago.
This is a great company, but I wouldn't pay more than 20 times forward earnings for the stock. So it's firmly on my bench for now.
3) Kudos to British hedge-fund manager Chris Hohn of TCI Fund Management. As reported by Forbes, he set the all-time one-year hedge profit record last year when his fund made $18.9 billion for its investors.
And he did it the right way – not with leverage, speculation, or frantic trading, but by owning and holding a very concentrated portfolio of extremely high-quality businesses for the long run. That included GE Aerospace (GE), Microsoft (MSFT), Visa (V), Moody's (MCO), S&P Global (SPGI), and European aerospace stocks Airbus (AIR.PA) and Safran (SAF.PA).
Even better, he runs his fund mostly to benefit his charity, the Children's Investment Fund Foundation, which has received and donated billions of dollars.
For more on Hohn's remarkable story, see this post on social platform X, which begins:
Hohn's story is wild.
In 2008, he lost 43% and watched his fund collapse from $19 billion to under $5 billion. Investors fled. He publicly swore off activism after getting humiliated in a railroad proxy fight.
17 years later, he just posted the largest single-year hedge fund profit in history.
Here's what happened in between:
From 2003 to 2007, Chris Hohn was the golden boy of activist investing. He ran TCI like a wrecking ball. Bought 1% of ABN Amro and sent a scathing letter demanding breakup. Triggered a $100 billion bidding war at the peak of the market. Forced out the CEO of Deutsche Börse after killing their London Stock Exchange bid. German politicians called him a "locust." He didn't care. Assets soared 30-fold in five years.
Then 2008 hit...
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.