Micron, Credo, Lumentum: 3 AI Strong Buys

wildpixel/iStock via Getty Images wildpixel/iStock via Getty Images Listen here or on the go via Apple Podcasts and Spotify Volatile markets and safe haven sectors (1:00) Highlighting 3 AI stocks: Micron Technology, Lumentum Holdings, and Credo Technology (5:15) Nvidia's failing valuation (16:40) Transcript Rena Sherbill: Very happy to welcome back to Investing Experts, Seeking Alpha's Head of Quant, our very own Steve Cress. Thanks for coming on. Steve Cress: Thank you so much for having me. I'm actually beginning to feel like an investing expert I've been on this show so much, but I appreciate it. Thank you. Rena Sherbill: Well, the reputation precedes you. We've long thought of you as an expert. And a lot of people have written in sharing how much of an expert they feel like because of the names that you've shared and the upside that they've provided. So I think the word is already out, but here we are beginning of April. We have a world war to contend with, which has brought out some people getting into gold, people getting into energy names with some good reason. But here you are today to share with us some tech names. We had Tech Contrarians on last episode talking about the tech names that they like, and also grounding us in this conversation between sentiment and valuation and that relationship is a bit divorced these days. How are you looking at the market? Why are you focused on tech today? What are your thoughts about the gold and the energy conversation? If you would ground us in the current moment, I think that would be helpful. Steve Cress:. Without question, the markets have been very volatile. There's a lot of fear out there and sentiment has been driving the markets. When you come into a geopolitical environment like this, individuals, investors, institutions, they tend to rotate into safe haven sectors or into cash. Typically, they would rotate into asset classes like gold and silver. Although we did not see that immediately. And I think that's due to the fact that gold (XAUUSD:CUR) has had such a huge run up for the last two years that there were fears that it was actually extremely overvalued, but also in relation to the movement in the dollar, gold sold off as well until we got to this most recent hit period. So we did have the dollar (DXY) strengthening when gold sold off, but when this Iran action really happened a couple of days afterwards, that was sort of the bottom of gold and people did start, investors did start moving back into gold. And we have seen a fairly good rally in gold and silver over the last two weeks, which is sort of a two month trend of gold and silver selling off. it's been a fairly complicated market. The market is quite uncertain. And I think that's reflective of, you look at the CNN fear and greed index that's hovering around the 13 to 19, extreme greed would be up at the 100 level. oddly enough, if you look back a year ago when we had tariffs, that's the last time that the CNN fear and greed index was an extreme fear territory. Actually, I want to take that back because we hit a period during October and November where there were fears due to valuation levels and the valuation framework for many AI tech stocks and the market sold off and that CNN fear and greed index dipped back into extreme fear territory. So typically we get ourselves in fear territory when sentiment is high, fear is high. And the same thing typically happens. Investors sell stocks that have good fundamentals and they try to raise cash and they try to redeploy it into utilities or into cash or into treasuries. And it creates a real opportunity. And that's exactly where we find ourselves right now. Some excellent technology stocks have sold off and they've been selling off really since October and November. A little bit of a reprieve, but the current geopolitical events and investors just fleeing stocks with good fundamentals, especially the tech stocks have created some wonderful opportunities. And I think it's time to take advantage of that. The market tends to be its worst when there's maxim uncertainty. You tend to know what the really bad news is. The market tends to stabilize. When you know what the really good news is, the market tends to stabilize and individuals look for stocks with good fundamentals. But when you're in that period where uncertainty is climbing and nobody really knows what's going to happen. That's a worst case scenario for stocks. And that's where we see corrections. And I believe that we really have seen that the market has begun to settle in a little bit. Some of these tech stocks have begun to rebound, but they're still well off their highs. So what I decided to do was focus on tech stocks that had really strong EPS growth rates. So I went to our Seeking Alpha screeners and I looked for stocks that were strong buys on the tech side with the fastest EPS growth rates for a several year period. And I was able to identify a few of them that look really good. Three, which I'll highlight today are Micron Technology (MU), Lumentum Holdings (LITE), and Credo Technology Group (CRDO). All these stocks have come off sharply from their highs and I believe they present a really good opportunity. Now will say I wrote this article on April 2nd and Lumentum has already started to rebound quite strongly, but it's got an incredibly strong growth rate. So no fear there, I would still be looking to invest in this stock. Rena Sherbill: I would also add these were all three of these were also in your top 10 AI stocks for the year. Anything to make mention of there? Steve Cress: You know what? didn't even think about that, but that's actually really a good point. They were my top recommendations in the beginning of the year. And I believe actually since the beginning of the year, most of these have actually fared well considering the massive pullback that they have had. If you bought them in the beginning of the year, you're still looking good. Oddly enough, despite that pullback today, Credo is up 3.35 % at the moment is up 4.3%. So I feel like people knew I was going to recommend these stocks, which is not the case because we just started this moments ago, Micron Technology is down about 1.4% and that has been hit fairly hard, the peak a couple weeks ago, March 18th, was trading at $461 and now it's down to 373. And this is actually like my number one pick in the semiconductor area and even out of IT stocks, it's my number three pick. So I really like Micron. I think it's really taken it hard as Nvidia (NVDA) has taken it hard as well. But this is just a much better valuation framework than Nvidia and we only have a hold on Nvidia and this is a strong buy. It has incredible growth. If we take a look at the growth rate, it's absolutely amazing. The year-over-year EPS growth for Micron is 412%. That's the year-over-year number. And the forward EPS CAGR, which is using Wall Street consensus estimates, the growth rate is 324 % compared to the sector, which is only 15%. So just a terrific growth scenario. And the valuation is dirt cheap. You'd be really hard pressed to find another semiconductor company that trades at a PE multiple of only six and a half times. So that's why I really recommend to individuals, great fundamentals here, stock has just come off of because of fear and sentiment and that rotation in the safe haven stocks. A little bit of fear on some AI stocks being overstretched, but this certainly is not one of them. Rena Sherbill: So what made you pick these three specifically out of the top tech stocks? Steve Cress: I'm glad you mentioned that because they were my top picks of the year. And you can easily say, well, I'm just sort of talking about a book, but that is not the case. We ran a screen and the screen showed all these stocks towards the top of the screen. So that is exactly why I picked it is because at this time and at this moment, they were ranked in the top part of the screen with very strong growth rates compared to all the other IT stocks. So that is why I selected these stocks. Rena Sherbill: And can you get into the specifics of the growth factors that has you so bullish on them? Steve Cress: Each of them within their particular areas of technology, they're all a little bit different. MU Micron Technology is a semiconductor company. So obviously I think people are aware of the demand that's out there for many AI related products or services, particularly with data centers and servers and products that have more technology in it that require chips now that are using AI. There's just tremendous growth for Micron based on that inherent growth. When we take a look at the moment holdings, this is a communications equipment company, so not semiconductors. and their value add is in the supply chain for cloud and for networking. So it's a very different area than semiconductors, but still very related to data centers and the built out of data centers, and cloud technology that is now more dependent on AI and data. So, that's where it fits in. Some diversification there and with Credo. That is also a semiconductor company, but not nearly at the same scale as Micron, much more microscopic in terms of what they do and the strategic services and the connectivity that they provide. So not nearly as large as Micron, but more of a high beta play, I would say, on AI than a Micron. But the stock has, in terms of their growth rate for Credo, we're looking at a forward EPS growth rate of 274%, their year over year growth was 5,800%. So the forward growth is not as strong as it was year over year, but still incredibly strong. So all three indirectly related to AI, but a little bit of a diversification amongst them. Rena Sherbill: And for investors following these stocks, as you've mentioned, as we've heard on this podcast, this divergence between price and fundamentals, listening to your previous episodes, I would gather that the only reason for investors to get out of these names is if they see Ds and Fs across the factor grades? Anything else to say in terms of what investors should be looking at along the way? Steve Cress: Well, I think like looking at those grades as a telltale, if you see something, you know, that has a lot of green, like A pluses, A's, B pluses for growth, for valuation, for profitability, that tells you, that gives you an instant characterization that the company not only has good fundamentals, but it has good fundamentals versus their competitors. And I think no matter what period when you're investing, you should not let fear and trends dictate what you're doing, which dictate your investments are solid fundamentals. And that's why I often say, really, don't pay attention to the talking heads, the strategists, the economists, the newscasters. No matter like what the environment is, history is proven if you stay disciplined and you're in there buying, you know, every month or every quarter, that is how you build generational wealth. And basically you don't want to pay attention and really of anything when you do run into corrective phases as you do now. At the end of the game, at the end of the day, the name of the game is buy low and sell high. So you don't want to buy when it's low. It doesn't feel instinctively right, but you absolutely do want to buy when it's low, there's a lot of emotion in buying a stock that's been selling off because you feel like, is the world coming to an end? Instead of the market being down 7% will it be down 30, 40, 50. But if you keep buying along the way, when it goes down, your upside will be huge. We actually did a study back in February of last year. We looked at the last five corrections, going back to 2010 where the market had pulled back about 15%. And we found on average that even if you just bought the S&P (SP500) during that period where the market was down 15%, if you held it for two years, you were up 50%. But more importantly, if you bought the top 10 quant strong buy stocks, when the market was down 15%, if you held those for two years on average, you were up 117%. So it just shows you like buying on those pullbacks, you really get rewarded by just sticking with it. Rena Sherbill: Last time you were on, you were talking about REITs, but we also got into a conversation around Credo and Micron, and you were saying that you had just bought that day on the dip. What makes you keep nibbling? Like, what are the days that you keep nibbling and how much do you get into it? how much would you, how do you encourage retail investors to think about that, buying along the dips? Steve Cress: I like to buy it when the market is coming off sharply and it seems panicked. I feel like those are the days that you really get rewarded the most. and often like even the next day it comes back, even if it's just like a dead cat bounce, and often we'll come back quickly and then it can continue to go down more. But when it feels like there is, I want to say sort of like uncontrolled selling by the marketplace, not a consistent strong sell that even 1 % or one and a half percent, but like when the market gets like into 2 % territory and more importantly, when you have really quality stocks coming off like 10 or 15 % over the course of several days, that feels like panic selling. That's when I like to go to buy. Rena Sherbill: And what would you say in terms of investors that are following along the quant system? What else would you contextualize for them these days specifically, or is it completely agnostic to what's happening in the market? Steve Cress: That's actually a great question. And I think I've mentioned to you before the quant system is often like a Richter Scale and being from California, you could probably relate to that. The quant stocks tend to sell off first when something goes wrong and people don't even know what's going wrong. And they come off the first, they come off first and they come off the hardest. The quant stocks are the stocks with great fundamentals, but they're also stocks that have had really good momentum. So when people want to raise cash, they sell what they've really made a lot of money in and they start taking profits and it sort of becomes a domino effect. The momentum takes over and the stocks continue to get sold despite them coming out with like record revenue and record earnings and analysts forecasting that that's going to continue. In the quant world, that's something that I look for. And when we get into phases like this, I'm able to prep our subscribers and investors and say, it's coming off and it looks like as long as there's uncertainty out there, it probably could even come off harder and faster. But then it gets to a point where there's still uncertainty with the overall market, but these stocks begin to rebound. And that tells me that what, this market pullback and correction will probably be over shortly because the stocks that I like are already starting to rebound. And I am finding that with a lot of the stocks that we recommend. The Alpha Picks portfolio has been outperforming. PQP has been outperforming year to date. They're both up versus the S&P 500. But it didn't feel like that like two or three weeks ago. They felt like they were underwater. But now these stocks have actually started to come back. But the overall market is still really soft and nervous. Rena Sherbill: There's a lot of talk about Nvidia (NVDA), obviously, when you're talking about tech names and AI stocks. And there's also a lot of talk when you're talking about tech names to get into a reason why not to get into Nvidia right now, even though it looks so good and the growth is so exciting. And if you look at it, according to the quant system, you'll see that it's a hold because the valuation is at an F. Can you talk us through why that valuation is a failing grade as opposed to let's say Micron, which has a B plus valuation? Just in terms of stocks that you're wondering how much they're oversold and whether or not to get into them. I think that might be edifying for investors to hear the process behind that. Steve Cress:. Well, first I would say if you own Nvidia, our rating is hold. That does not mean sell. So sell means sell strong sell means sell hold means hold. So if you own this stock, I would not get out of it. I think over the last month, the stock has been flat. Year to date, Nvidia is down 5.5%. And I don't think anybody would have expected that even at the beginning of the year that this stock would be down five and a half percent, considering over the last five years, it's up 1146%. So it's had a heck of a run for the last five years, but as of recent, the valuation grade is an F. I will say when I look at that F there are metrics now that are green and yellow that used to be all red. Part of the beauty is our platform. If you go to a growth page or a value page or a profitability page, you see all the underlying metrics that make up that overall grade. So when I'm looking at the valuation now for NVIDIA, it shows an F, but the underlying metrics show PE at C plus, forward PE at B, PEG at A. And then you see some that are in the red, as EV to sales, price to sales, price to book. This actually has a much better look than it had in the beginning of the year, but it was just like right across the board with the exception of the PEG ratio. So even though it's a hold, I would be a little bit more optimistic. The valuation framework does look a little bit better. And if you wanted to just look at PE and PEG, and you said those are my two determining factors, when you combine that with the other grades, growth is an A minus, profitability is an A plus, revisions are a B plus. I'd say the stock looks pretty good. But that's one of the good reasons why I tell investors and subscribers, don't just look at the overall grade. Make sure you look at the underlying metrics because it may speak to you differently. Rena Sherbill: To that end, can I ask you a couple of questions about moment , just in terms of the profitability being at a C and the valuation being at a D plus? I know you were talking about the growth, is very understandably at an A plus, but if you could talk investors through the valuation and the profitability on that stock. Steve Cress: So valuation is a D plus the stock is still strong by, if you went to the valuation page, almost every factor grade is red, being an F for the most part, with the exception of the PEG ratio, which is an A minus. And that's where it combines PE and growth and the growth for the company is such an outlier compared to all the other technology stocks that that one grade really brings it up. So the overall grade is the D plus territory. It's a relatively younger company compared to many others. the profitability in some areas, it looks good. The gross profit margin is a D plus, but if I look at net income margin, it's a B plus. And if I look at return on equity, that's an A, it's actually almost 30 % versus sector at 6.6%. So there are definitely profitability metrics that look good from this company, particularly cash per share is $9 and 21 cents versus the sector at $2.52. So I just think that gross profit margin and also the leverage free cash flow margin is a D plus that brings down the overall profitability grade to C. In terms of the revisions, the revisions actually look really good at this company there in the last 90 days, 19 analysts have taken their estimates up and zero Alice have taken it down. So it's got a revision rate of an a minus. So that actually looks pretty strong. I think you must've just been talking about value and profitability because all the other metrics are a for momentum. Analysts definitely like the company. Basically what that means in revisions., it means 19 analysts revised their existing earnings estimates up higher and not one has revised their estimates down. So they're really liking that company. Rena Sherbill: I was curious if you would, A, if you have any thoughts about how interest rates and inflation color or don't color any of your thinking as a quant man. And then also I was wondering if you would share, I think it might be interesting and also instructive for listeners. I'm curious how you use Seeking Alpha throughout your day. You wake up, what's the first thing you look at and then throughout the day, what are you looking at? Steve Cress:, To answer the first part, we do not in our algorithm tie in inflation or interest rates, but we do use forward estimates on stocks that are consensus from Wall Street analysts. So to a certain extent, many of those analysts will incorporate inflation and interest rates into their numbers. So that's how in an indirect manner, it's into our numbers, but we rely on the Wall Street analysts and their forward estimates to bring that in. So I don't want to say that we're agnostic towards that. We don't tie it in ourselves, but we know that the analysts that cover these companies are tying interest rates and inflation in. And despite whatever the inflation is for the environment, whether it's going higher or lower, there will be stocks that benefit and there will be stocks that perform poorly. And we will see stocks accordingly move within our ranking system. And we'll see how these rotations impact the stocks. And sometimes we just see good stocks get cheaper and they become more attractive. They're still strong buys. So if the system believes a stock is mispriced, it will be a strong buy. If inflation were to be viewed as going up consistently, eventually that would work its way into the estimates from analysts and there would be downward revisions. And those downward revisions would have a negative impact on our stocks. And your second question was, so first thing I do in the morning is I bring up the portfolios. So as you might be aware, I manage the Alpha Picks portfolio and the ProQuant Portfolio. So I take a look at the portfolios right away. This is before the market opens. And I look to see if there's been any rating changes, have stocks drop from a strong buyer buy down to a hold or to sell. So that is the first thing that I look for. And if I see that I try to identify the reasons why. So if a stock has dropped to hold, I'd like to see what grade has changed. Has it been the value grade, the growth grade, the EPS revision grade? The second thing I do is I look at aftermarket hours to give me an indication of who's been hurt in the after hours. So I might be able to identify stocks down 10, 15%. So I'll be able to look at what's happening and get a sense of where the pain is going to potentially be. If there's no pain and there's no rating changes, the stocks look strong. It's a great way to start your day with a good cup of coffee. Rena Sherbill: Well said, well said. The other question I had for you as we wind down the conversation is as the AI sector continues to develop and evolve, I imagine consolidation will play a fairly big part. How do you think about the evolution of the AI and the tech sector and what would you note along the way? Like how do you, how are you paying attention to those different factors? Steve Cress:You know, with my particular quant system, you know, I look at the data and I look where revenue is being generated and earnings are being generated. So I think one saving grace for this system is even though there could be a lot of AI companies that are starting in order for it to be considered on our screen, one, it has to be trading for at least a year. And we're also looking for companies that collectively are strong on growth, value and profitability. So we're not just going to follow any AI stock. It really has to be able to demonstrate through the data that that growth is there. The valuation is there. And analysts forecasts are there. So it could have the best story in the world. It doesn't mean it's going to be recommended by our system. We go by the data. Rena Sherbill: Steve, what else would you add for investors in this conversation? What else do you feel like is noteworthy? Steve Cress: I feel like we are at a stage for the overall market where there's still uncertainty. Obviously with our geopolitical events and the war in Iran, I don't think that uncertainty is disappearing overnight. We also have midterm elections coming up in November, which add to the uncertainty. So I think you've often heard me talk about this barbell approach. And I would just advocate to investors, continue to look at stocks with good fundamentals that have pulled back and acquire those stocks as they are falling, but to sort of get paid to wait at the same time, maybe sell those really speculative pie in the sky type stocks and focus on stocks that pay dividends that are quality companies and have sort of a balance during this period of uncertainty of buying stocks that are pulling back that have great fundamentals and offsetting it with companies that pay dividends that are not likely to come off as much events get even more heated. And I think that presents you with a really good balance. Rena Sherbill: You know, our headline for our last episode with Tech Contrarians was The Cure for FOMO. And I think that following quant or adhering to a quant process and a quant strategy does just that. It really is the cure for FOMO because you're not worried, you're not assuaged, you're not encouraged or discouraged by the headlines, you're sticking to your thing come hell or high water or come rose colored glasses, you have your thing. Would you say that given your experience in the quant system and also in the market in general, do you feel like at this point you really don't have FOMO, like you really are locked in to your strategy or you're as human as everyone else and you do get kind of... Steve Cress: No, I feel like I am locked in and I'm laughing because I have a good friend who feels like they're spiraling out of control with it. So they're asking me, they're spiraling and they're like, you know, how can you not be spiraling? Rena Sherbill: It's a good time to spiral. If you're going to spiral, now's the time. Steve Cress: I do feel bad because it's these are horrific events that are happening. know, no matter what side you're on, it's awful. People are dying and you don't want that. My training is to help people invest and particularly in periods like this, it's to stay calm and carry on. I'm looking at opportunities for investors and that's in essence is my job and I'm sticking to it as much as somebody who's spiraling out of control doesn't want to hear that. That is the balance, but I do stick to what I know. And I can tell you repeatedly over time, people have thanked me for being so stable during periods like this and coming out with strategies and recommendations that, I feel offer the best opportunity. Rena Sherbill: Is that friend taking some of your counsel? Steve Cress: I think my friend is taking many other things to calm down. Rena Sherbill: Fair enough. Fair enough. Okay, so we've shared it before, but let's share it again. You run Alpha Picks. If you are a pro subscriber to Seeking Alpha, you also get the ProQuant portfolio. You write articles. You do webinars. Where can people find out more about you at slash get in touch with you? Steve Cress:. So any article I write, you can follow me and you will get all my articles. And I will also say, despite all the volatility we've had this year, year to date, Alpha Picks is actually up 7.19 % versus the S &P, which is down 3.83%. So our strategy of sticking with stocks with good fundamentals has panned out. If you looked at that a couple of weeks ago, it would have been a little bit uglier. But as I said, many of our stocks are actually starting to rebound. So I think we, to a certain extent, have hit that maxim period of uncertainty. In terms of the ProQuant portfolio, that is up 2.88 % compared to the S &P, which is down 3.83%. So both have been doing fairly well. My guess is when the environment does begin to normalize, many of these stocks in the ProQuant portfolio and Alpha Picks willreally rock it. We'll probably see some better performance out of the stocks in the Pro Quant portfolio. There are less restrictions than Alpha Picks, Alpha Picks we're simply putting out our two best ideas a month. And we do have restrictions such as market cap. And we actually like don't really invest in ADRs with Alpha Picks, stocks have to be over $10 a share where the Pro Quant portfolio instead of just twice a month, we actually rebalance on a weekly basis. And sometimes there are two to three ideas a week. And we invest in ADR stocks all over the world. And there is no market cap restriction. So it's a bit more of an alpha-oriented product. But that alpha comes when investors are looking for stocks with good fundamentals, not necessarily when they're being driven by fear. Alpha Picks, it's on the premium platform. You can just put it in and it'll come up. And if you're a Pro, you get that product automatically. Rena Sherbill: Thank you Steve. Appreciate this conversation. Listeners should note that you are on monthly so if you have any questions for your next appearance in May, happy to receive those and answer them accordingly. Steve, thanks as always. Appreciate your time. Steve Cress: Thank you so much for organizing it. Truly appreciate it. This article was written by