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Two Top Stocks for 2010


If they're appropriate for your risk profile, jump in.

As December draws to a close, it's quite common at this juncture to wax poetically about the year just passed as well as prognosticate on the one about to commence. I'll skip the fond remembrances of 2009 but will offer up my two best ideas for 2010.

It should come as no surprise that at the top of my list is Micron (MU). I've commented on it a couple of times in recent months (See the most recent post, Avoid Micron at Your Own Risk) and you can check those notes as to why I think it's a good idea. Micron's also a holdover from my 2009 "best ideas" (Apple (AAPL) was the other) but the points I highlighted earlier haven't changed, so there's no reason to take it off the list.

The company reported its first-quarter/fiscal year 2010 last Tuesday and the results were huge. But, true to form, there were the usual "yea buts" the following morning from the nay-sayer clan. Most of their comments followed a predictable script: The stock's had a nice run and we think it's at or close to peak margins (i.e. gross margin).

Let me suggest that none of these analysts can tell you what peak margins are for Micron because they're incapable of predicting future memory prices. (Tell me all the oil analysts that predicted $150 per barrel a year in advance). But, aside from the fallacy in that logic, investors need to look at the historical record.

I've commented in the past about the introduction of Windows 3.0 (1990) being a seminal event in computing history because it broke the 640k memory limitation on personal computers. However, it wasn't until a number of bugs were fixed in Windows 3.1 (1992) coupled with dramatic Intel (INTC) price cuts that we saw a real explosion in demand for PCs worldwide. And that explosion continued for a number of years.

What's this got to do with Micron? Simple, look at the table below for its gross margins during that period and remember the analysts comments about peak margins today. Is this the same environment? No, of course not but:

  • We currently have generally depressed economic circumstances in many geographies;

  • Companies worldwide have delayed upgrading their desktops for years to avoid Windows Vista; and

  • Demand today derives from a far larger and broader category of devices than it did 15 years ago, including servers, networking, smartphones, set-top boxes, and Mobile Internet Devices to name a few.

Micron's margins are obviously capable of going much higher.

My second name is FormFactor (FORM), a small-cap (about $1 billion) semiconductor wafer fab equipment company. FormFactor makes wafer probe cards used in the testing process to determine the good die on a wafer. The bulk of its revenue is from DRAM manufacturers where it has more than 50% market share but it's now moving aggressively into NAND flash and other end-markets.

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Position in MU
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