Sales Alert
The fickleness of short-term-oriented traders again was on display last week with some of the stocks involved in the AI Buildout, so we continue to like our strategy of taking a little money off the table on names that have appreciated sharply in value to become larger weights in our broadly diversified portfolios.
Such was the case on Friday, October 2, when we chose to take advantage of the 200%+ jump this year in Cohu (COHU - $73.48). Shares of the volatile semiconductor test handling equipment manufacturer rebounded back to their end-of-Q2 price after suffering a dizzying 45% descent in July, prompting us to trim our positions by 17% to 18%.
While we expect management to have positive things to say at the upcoming 18th Annual CEO Investor Summit on October 13, and chipmaking equipment companies provide the proverbial picks and shovels for the AI gold rush, the stock was trading in the $40 range at the end of July when the company posted a 38% jump in Q2 revenue, turned in EPS of $0.26 and forecast better-than-expected Q3 sales.
We think analysts may be light in their profit projections, but we can't ignore that the current Year 2 P/E ratio for COHU is 36, so we thought it prudent to cash in a few of our chips, even as we believe that our AI Buildout stocks either are attractively priced today or will continue to grow into their valuations over the next few years.
Of course, as we saw on Friday, sentiment can turn on a dime as was the case with data-storage provider Seagate (STX - $849.99), shares of which fell as much as 15% intraday, before closing down more than 10%.
Given such a dramatic plunge, one might have thought Seagate offered a weaker-than-expected outlook, but there was no such news. Instead, an announcement from Toshiba that the Seagate competitor was planning an expansion of its hard drive manufacturing capacity was the culprit.
To be sure, we have been involved in the data-storage space for decades so we respect that the industry has long endured cyclicality, as evidenced by the red ink posted in fiscal 2023 and fiscal 2009. So, we have rung the register on several occasions on chunks of our Seagate holdings over the last year or so, but the EPS growth outlook remains off the charts,…
…with a few Wall Street analysts riding to defense of STX over the weekend,
Per The Fly via Bloomberg, “Citi believes that even if Toshiba can double its hard disk drive capacity, the industry will remain undersupplied. The HDD industry is currently under-shipping unconstrained demand ‘by a wide margin,’ the analyst tells investors in a research note. Citi recommends buying shares of Seagate (STX) and Western Digital (WDC) on Friday's selloff around Toshiba's plans to double HDD capacity."
“Bernstein believes Toshiba's comments yesterday to double hard disk drive capacity were misunderstood. Toshiba's press release actually said that it is aiming to nearly double production capacity by fiscal 2027, which ends March 2028, the analyst tells investors in a research note. If Toshiba doubles exabyte output while Western Digital (WDC) and Seagate (STX) each grow exabyte by 25%, in line with their long-term plans, the resulting Toshiba exabyte share would increase from 11.2% to 16.8%, says Bernstein. The firm adds, ‘Although significant, a 5.6% increase in market share isn't that alarming and nowhere near the 30% market share reported in the press today.’ As such, Bernstein views yesterday's news as a ‘storm in a teacup’ and would look to buy shares of Seagate and Western Digital on the selloff. It reiterates Outperform ratings on both names.”
We continue to believe that the appetite for data storage is voracious, so though we realize that traders will shoot first and ask questions later at the first sign of overcapacity, we are comfortable holding our current STX shares for our $1270 Target Price.
And Seagate was not the only volatile AI-Buildout name last week as Chris Quigley writes,…
Electronic manufacturing services heavyweight Jabil (JBL - $304.41) reported fiscal Q4 2026 results on the morning of September 30 that were, by virtually any measure, outstanding. Revenue came in at $10.62 billion, a 9.5% beat versus the $9.69 billion consensus, while adjusted EPS of $4.40 topped the $4.07 estimate. Year-over-year earnings grew nearly 34%. Core adjusted operating income was $675 million, also ahead of the $626 million estimate. The blemish, if there was one, was the gross margin which came in at 9.43%, modestly below the 9.74% consensus. Despite the strong report, the stock fell as much as 10.8% intraday.
For Q1 FY2027, management expects revenue between $10.6 billion and $11.4 billion (vs. $10.0 billion consensus) with core EPS between $3.80 and $4.20 (vs. $3.62 consensus). For the full fiscal year 2027, Jabil sees net revenue of $44.5 billion, compared with the $42.64 billion consensus, and core EPS of $17.55 versus $16.87 consensus. Adjusted free cash flow is expected to be $1.6 billion.
Unfortunately, memory constraints persist. Chief Supply Chain Officer Frank McKay said, “Memory in particular is being reallocated towards AI and hyperscale demand, tightening supply across many of the diversified end markets that we serve. We view this as a structural shift in global capacity compounded by ongoing geopolitical disruption, and we work with customers and suppliers to understand where those pressures could affect the launch or production schedule so that we can act early. Our supplier relationships are central to that work. We've identified about 120 strategic partners that we engage like customers…In constrained markets, allocation follows trust as much as order size does. That's when those relationships pay off directly for our customers, helping us work through allocation, qualify alternate sources and coordinate commitments needed to support our ramp.”
Not surprisingly, in our view, Jabil bounced back on Thursday and Friday, and the stock has gained more than 33% this year (even after the whack), although shares trade well below the intraday $429 high set on June 17. As earnings have grown over the past few years, the valuation for JBL has stayed reasonable, free cash flow generation has climbed significantly and the balance sheet has remained strong. Analysts expect EPS to grow in the 22% to 35% range in each of the next three years, and although we are a little bit more conservative in our estimates, the Year 2 P/E is less than 14, so our Goal Price of $468 still shows handsome upside potential.
Micron Technology (MU - $1074.89) reported fiscal Q4 2026 results that blew away its own records. Revenue of $54.23 billion came in 5.3% above the $51.49 billion consensus and represented a nearly fivefold increase from $11.32 billion in fiscal Q4 last year and $7.8 billion in fiscal Q4 2024. Looking to the quarter ahead, the memory maker sees adjusted revenue between $60 billion and $63 billion (vs. $56.7 billion est.) with EPS between $37.15 and $39.15 (est. $36.02). Operating expenses are expected to rise slightly to $2.06 billion, which would crimp the gross margin to 86.3% compared with the 87.0% figure in Q4.
The market reaction to the stellar results in the two trading days since their release was all over the map,…
…but MU shares have gained more than 275% this year and earnings per share have climbed considerably from the $1.30 annual figure in 2024. The Idaho fab is expected to have its first wafer output midway through next calendar year, although meaningful supply growth is expected arrive “a few quarters after that.”
CEO Sanjay Mehrotra said, “Super Intelligence is creating the most compelling opportunity for Micron in its history. Fiscal 2026 was an outstanding year and we expect fiscal 2027 to be even better. As we celebrate the 48th anniversary of Micron's founding, I would like to acknowledge the nearly five decades of innovation, disciplined execution and perseverance that have prepared Micron for this moment.”
MU expects to return more than 100% of excess cash to shareholders starting on December 9. The current repurchase program allows for $2.2 billion of share buybacks and management says investors “can assume that we will see additional authorization in the near term.”
Micron has enjoyed an almost unbelievable run of industry tailwinds, and we see little reason for that to change given the multitude of dynamics that support memory makers in general. To be sure, memory has historically been a cyclical business and elevated prices inevitably invite new supply, raising the risk of oversupply and margin pressure. Still, we believe much of that incremental capacity can be absorbed by continued demand growth, especially from firms unwilling to pay the current sky-high prices.
More importantly, AI has been changing the character of memory demand with customers willing to commit to supply well in advance, suggesting that this cycle may prove both more durable and more pronounced than prior upcycles. In our view, the key question is less whether the memory market will eventually normalize (it will!) and more whether the increase in AI-related demand has permanently changed the structure of the cycle. Noting that our positions generally are large in size, despite selling a few shares along the way, our Goal Price for Micron is $1465 and the Year 2 P/E ratio is an extremely low 5.
Market Discussion
We know that stocks are much more volatile than bonds, but they have produced far better returns over time,…
…albeit with trips southward each and every year,…
…but we found it interesting that a review of Q3 investment returns published by The Wall Street Journal saved its negative words for stocks, which “limped” into the fourth quarter, and used positive terms for bonds.
Indeed, in the third quarter, “An equal-weighted version of the S&P 500, where tech companies’ larger market value doesn’t cause them to have an outsize impact on performance, fell 2.3%, snapping a five-quarter winning streak.”
Meanwhile, “The 10-year U.S. Treasury yield ended the past three months with its largest quarterly gain since 1994, notching a rise of nearly 0.9 percentage points. On Wednesday, the last day of the quarter, the 10-year touched a 24-year high.”
Who wouldn’t want big gains and 24-year highs when it comes to their investments? Obviously, if you own bonds, rising interest rates are not a good thing and the U.S. Aggregate Bond index lost 3.5% in Q3, worse than the “fall” in the S&P 500 Equal-Weight index, while the iShares 20+ Year Treasury Bond ETF skidded 8.95%, adding to the woes of those who have put a combined $100 billion into the three long-term government bond ETFs in the chart below over the last five years.
There is no assurance that stocks will continue to appreciate in value in the face of higher interest rates, which seems to be the biggest bogeyman spooking equity investors these day, but we think returns for the Value indexes and the Dow Jones Industrial Average in the table above would be a good Exhibit A for those who actually take the time to put forth a case for what has happened historically. After all, the yield on the 10-Year Treasury rose from less than 1.5% to more than 5.25% during those five years.
Of course, keeping in mind that the numbers reflect average returns and there are negative periods in the mix, there is also Exhibit B showing strong returns through the years whether the 10-Year yield is above or below the recent level, with Value actually performing better with higher rates.
True, the latest rise in bond yields has been rapid, but Exhibit C offers a study of the periods since 1990 where the rolling-3-month yield change exceeded the historical mean by one standard deviation or the rolling-3-month yield change exceeded +50 basis points on an absolute basis. Here again, the majority of these events saw positive equity returns.
Finally, Exhibit D shows that the S&P 500 has gained ground during each of the last 6 Fed Tightening Cycles,…
…which seems to be the regime in which we are now operating, given that the betting odds in the futures market are calling for three more 25-basis-point hikes in the Fed Funds rate over the next 12 months,...
…but it is important to note that even if the upper bound for the Fed Funds rate moved to 4.75%, it would still be below the long-term average.
*****
While history shows that in the fullness of time, the broad U.S. equity market has historically recovered from significant market declines,…
…we realize that anything can happen in the short run, so we remain braced for downside volatility,…
…especially as October, on average, has not been the best of months.
Still, come what may, we think equities warrant a significant spot in most asset allocations, as over time, stocks have followed corporate profits higher,…
…and earnings are still projected to grow handsomely over the balance of this year and in 2027 and 2028,…
…as U.S. GDP growth is expected to continue on its long-term upward trajectory,…
…with even the latest estimate for near-term real (inflation-adjusted) GDP growth from the Atlanta Fed standing at a healthy 3.7%, though we concede that that projection was made prior to Friday’s weaker-than-expected monthly jobs report.
Still, we see no reason to alter our long-term enthusiasm for equities in general and Value stocks, which we think remain reasonably priced, in particular,…
…though we generally believe that time in the market can be more important than market timing!
Stocks in the News
Jason Clark and provide pertinent updates…
