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David Shaw Makes Waves in the Semiconductor World

David Shaw got his start in 1988, when he convinced the Wall Street investment firm Paloma Partners to back him in the new field of quantitative trading. Shaw, a brainy buy with a PhD in computer science and a complete neophyte in financial world, told his backers, “I think I can use technology to trade securities.”

He was right. His firm, now the D.E. Shaw Group, has taken it’s initial $28 million in capital and grown it into a $47 billion hedge fund, earning more than $25 billion for its investors. Shaw himself retired from active leadership of the firm in 2001, although he remains connected to the trading operations.

In its most recent 13F filing, the D. E. Shaw Group revealed that it has upped its holding in Micron Technologies (MU), while cutting back drastically on American Micro Devices (AMD). A brief look at the numbers tells the story.

Shaw Group bought 1,386,790 MU shares, boosting the fund’s holding by 53%. At the same time, the filings show that the fund reduced its holdings of AMD by 2,996,831 shares, or 65%. Prior to the transactions, Shaw Group’s holding in AMD was almost double that in MU; the fund has now reversed that position and holds more than twice as many Micron shares as AMD. It’s a drastic change and deserves some closer examination.

The Selling Case for AMD

At first glance, AMD doesn’t look like a stock to sell. It’s up almost 73% year-to-date, and is one of 2019’s successful turnaround stories. AMD chips have quickly developed a reputation for high performance and quality, and that in turn has given them the leverage needed to draw market share away from rival chip-maker Intel (INTC). AMD have been on a tear. So why the sudden change in outlook by one of the world’s smartest quant trading hedge funds?

The answer may lie in that year-to-date gain. AMD opened at $18.01 on January 2; it closed at $31.18 on August 16. That gain has investors worried that, for now at least, AMD is played out, without significant room for near-term growth. Recent reviews from top Wall Street analysts support this contention.

5-star analyst Cody Acree, of Loop Capital, initiated his coverage of AMD with a Hold rating, saying, “We like the solid share gains but see the valuation as fair.” His price target, $32, is in line with that, suggesting just a 2% upside to the stock. Acree is joined by Mizuho’s Vijay Rakesh and Susquehanna’s Christopher Rolland. Both 5-star analysts reiterate Hold ratings on AMD, and maintain their price targets of $36 and $34 respectively. 

Overall, AMD’s analyst consensus rating remains a Moderate Buy, but that appears to be shifting. Of the 10 buys, 11 holds, and 1 sell assigned in the past three months, 3 holds were given just last week. The stock sells for $31.18, with an average price target of $34.10. This suggests an upside potential of 9%.

The Buying Case for Micron

Between June 2018 and June 2019, Micron didn’t look like a stock to buy. The combination of increasing supply and slower demand in the memory chip market put the obvious price pressure on the company, and MU shares were squeezed, losing half their value. MU seems to be coming out of the woods, however, as improved business confidence has led to increased demand which has in turn started working down the memory chip segment’s oversupply problem. In a conference call, Micron management said, “Demand is starting to return in a meaningful way, driven by renewed demand in the cloud and graphics segments.”

Micron’s year-to-date gain of 37% has outperformed the markets, but has not sparked worries that it’s maxed out. Investors look at MU and see a stock that’s improving, with room for more growth.

5-star Needham analyst Rajvindra Gill lays out the bulls’ case for MU. He says, “We view supply cuts as positive developments for Micron and the rest of the memory industry. We continue to be bullish on a stabilization in the supply-demand dynamic for NAND and DRAM in 2H19.” Gill’s $50 price target implies and upside of 14% for MU shares.

Sidney Ho of Deutsche Bank, concurs in the bullish assessment, writing, “We have confidence that the company's August quarter will be the trough this cycle.” Ho raised his price target by 22%, to $55, indicating a potential 26% upside.

The rest of Wall Street largely buys into what the chip giant has to offer, as TipRanks analytics reveal MU as a Buy. Out of 22 analysts polled in the last 3 months, 13 are bullish on Micron stock while 6 remain neutral, and 3 are bearish. (See MU'S price targets and analyst ratings on TipRanks)