Investors interested in the shares of Intel Corporation (INTC) should keep in mind three hoary and well tested Wall Street Maxims:
- panic bottoms seldom hold.
- bottoms take longer to form than tops.
- it is better to buy too late than too soon.
The market "bottom" in 2008 was a classic example of the first and second principles. The SPDRs S&P500 Trust Series ETF (SPY) fell to $73 in October of that year on climactic volume. A two month rally convinced many investors the bear market was over, but the final lows occurred on much reduced trading in March of 2009, at $66.
On the second point, the double top of 2007 in SPY took three months to form. The reverse head and shoulders bottom, the foundation for the bull market currently in progress, took nearly a full year to do so.
The third maxim is just a conservative rule of thumb, designed to prevent investors from trying to catch a falling knife. There is often plenty of room on the upside, even if you wait for the stock price and earnings/fundamental data to show signs of life. Back in 2007 you would have been a cocktail party punching bag if you waited twelve months for steady earnings performance at Amazon.com Inc (AMZN) before finally buying the shares: at $90! But you still have a good laugh: the shares sell for over $200 now!
As it turns out, Intel flouts all three of these maxims. Look at the chart below. There are three panic selloffs (early September, mid October, and late November). Each time the shares enjoy a week or two of stability as traders and bulls recover from the shock. Each subsequent rally has been disappointing.
Intel does not need another high volume selloff. It needs a slow, dragged out, boring (to day traders and whipsaw willies) bottom that stretches for several weeks to perhaps several months.
The damage done to investor confidence will take time to repair. Three months ago Yahoo Finance estimated earnings for this quarter at $0.72 a share. Now its down to $0.46, and still falling. With no growth, slimming gross margins, the punk reception of Windows 8, and continued doubt about penetration into mobile markets, there is no reason why the current P/E ratio of 8.5x should expand, either.
Follow the old adage: Don't buy too soon, no matter how attractive the current yield may be. The November selloff alone wiped out 3 years of dividends. There will be plenty of time to reconsider the shares, admittedly not at record low prices, after their financial situation stabilizes and quarterly data shows improving performance.
If you are an Intel trader hoping to catch a meaningful bottom (and perhaps, bully for you, the ultimate low) there is still one candlepin left standing, that must fall in order to signal the ultimate capitulation by weak hands and shareholders of the company. That is the implied volatility of options on Intel shares. Implied volatility, often called the fear index, is familiar to many investors on broad indexes like the Standard & Poor's 500 or the NASDAQ Composite. For example, the surge in implied volatility of options on the Powershares QQQ Trust Series 1 (QQQ) (yellow line) coincided with the June 2012 low in those shares, almost exactly:
Implied Volatility and QQQ Share Price 2012
What is the implied volatility on Intel options telling us? In short, while traders are worried, they still are not as worried as they were when Intel shares were selling in the high $20s just a few months ago.
Implied Volatility and INTC Share Price 2012
Despite a thirty percent decline in price since last June, short-term traders still have not panicked and thrown in the towel, the classic signal speculators look for. There are a lot of traders out there holding their shares, hoping for a rebound, not buying puts or writing calls because they are sure of an "imminent rebound." When the rebound weakens, disappointed traders sell their shares. No wonder the rallies have been so dismal.
Earning profits in INTC shares will require the patience of Job: and I don't mean Steve Job(s), either! Given the ongoing concerns about the fiscal cliff, 2013's economic performance, as well as other problems unique to Intel (such as Otellini's departure and replacement) I recommend the following investment stance:
- Long-term investors should wait for at least two quarters of improving earnings, margins, and mobile market penetration before even considering the shares. This puts Intel off the radar till next summer, at least.
- Traders should wait until the implied volatility for Intel rises, not only above the high twenties, but above the previous peak December of last year.
- Option writers of puts or calls wishing to capture premium income also would be better off to wait for implied volatility to rise as well.
Oh...By the way. There is one maxim I forgot to mention! If you buy on Smith's tip, you must sell off Smith's tip.
All those folks who told you to buy Intel earlier this year ... because the PE was single digits, because the yield was great, because the dividend was so secure ... did they tell you where to sell if prices went south? If they did you wouldn't be reading this article...would you?