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Over the past few months, shareholders of Intel (INTC) have not been treated kindly. Shares are currently experiencing a slight recovery from a 30% sell-off and further price declines could be possible in the future. In this article, I will quantitatively explore the factors that have historically driven share price and provide a bearish synopsis. Rather than relying strictly on one field, I will utilize fundamental, statistical and technical analysis to help the reader make the most informed investment decision.

Fundamentally Speaking

In order to fundamentally analyze Intel, I have relied heavily on return on assets and return on equity. Return on assets is the net income of the firm divided by average total assets across an operating cycle. This key metric allows an investor the ability to understand how efficiently an organization uses its assets to generate revenue. Return on equity is the net income of the firm divided by directly-invested shareholder equity. This ratio allows analysts to observe how well management uses investments to bring revenue into the firm. The chart below shows five years of return on assets and return on equity for Intel.

(click to enlarge)

In the bullets below, let's examine the relationship between firm performance and share price performance. A summary of this discussion is found in the table below.

  • The first period we will examine is the beginning of 2008 to the middle of 2009. During this period of time, the firm performance as measured by return on assets and return on equity decreased dramatically. This tangibly means that during these quarters, the firm became less efficient at generating revenue from assets and investments. This erosion in firm performance was met with a 27% decrease in share price.
  • Between the middle of 2009 and the first quarter of 2012, Intel had a very strong period of performance in which returns increased nearly five-fold. During these years, Intel was able to more efficiently capture profits and the share price surged 44% as a result. The market tends to reward firms that perform and punish those that lag.
  • From the first quarter of 2012 until the present, firm performance has been declining. This declining performance has been met with around a 20% decrease in share price. What is most noteworthy about this period is the share price performance over the past few months. Even though the fundamental landscape of Intel is currently in decline, shares have rallied around 13% over the last two months. This represents an investment opportunity.

It can be seen in the table above that a simple and logical relationship exists between firm performance and stock performance. As a firm experiences a decrease in performance, shares tend to lag as well. Conversely, as a firm betters its efficiency at generating profits, the stock price tends to rise. This relationship is very intuitive in that very few investors are willing to park capital with firms that do not deliver a return or effectively generate profits.

In light of this relationship, investors should critically analyze the recent rally in Intel's shares. The fundamental performance of Intel is currently in decline and yet shares are increasing. This is counter-intuitive and provides the shrewd investor an excellent shorting opportunity. Qualitatively speaking, investors should not be purchasing shares in a firm that is delivering diminishing returns to shareholders - it simply doesn't make investment sense. Quantitatively speaking, the recent buyers of shares are at great peril of further losses since changes in return on assets and return on equity are decreasing and have fully explained trend direction for the past five years. Traders who are purchasing shares at this moment in time are doing so against the prevailing fundamental trend and I believe that they may face losses in the future. Fundamentally speaking, the odds favor shorting Intel.

Statistically Speaking

When making an investment decision, individuals should not exclusively rely on a single input. By examining multiple fields, investors can better the probabilities of making a wise decision and ultimately profiting. In this section of the analysis, we will examine the statistical landscape of Intel. Through studying basic statistics, we investors can gain insight into the nature of a particular security.

In order to statistically analyze Intel, I have relied heavily on a simple concept known as standard deviation. As many of us remember from high school statistics, by taking a standard deviation of a set of data, we can determine what the normal variance in a set of data is and identify abnormal sets of data. Applied to the stock market, I have taken historic standard deviations of Intel's past returns. The chart below shows 13 years of Intel's returns. The bands surrounding the data show two standard deviations of returns, or where 95% of all returns should lie.

(click to enlarge)

The chart above shows monthly returns of Intel with a running upper and lower boundary. Intel is a fairly typical stock in that for the most part, returns are rarely larger than what is statistically normal. The significance of this statement is that since Intel is a normal security, we are provided trading opportunities when it departs from the norm. Specifically, if Intel experiences a larger than normal upward movement in share price, we can consider shorting the security until it experiences a strong counter movement to the downside. Likewise, if Intel declines in a larger amount than is normally expected, we can consider purchasing the security until prices experience a strong counter movement to the upside. I have constructed a trading system, which tests the logic of this statement and the results can be seen below. The trade number corresponds to the numbering on the chart above.

The results are very interesting in that they reveal that profit can be gained through exploiting the statistical nature of Intel. Specifically, investors who utilized this method of investing have earned around 45% over the past 10 years, while shares have declined over 26%. Perhaps more significant than the actual results of this method is the fact that this system provides a statistical trend direction. For example, on the first of November in 2011, a short signal was generated due to the fact that Intel had experienced a larger than normal upward increase. This signal didn't perfectly call the top of the market, but it did define the trend direction for most of the next 15 months. What is more significant is that statistically speaking, investors should still be short Intel. In other words, it is more likely that shares will decline in the future rather than increase.

Technically Speaking

Fundamentally and statistically, investors should be short Intel. The firm has experience degradation in performance as measured by return on assets and return on equity and shares will more than likely continue falling. Likewise, shares have statistically shown that price will more than likely continue decreasing in the future. Technically speaking, investors should wait before shorting Intel. Price has shown strong resilience over the past two months and it could continue to experience gains in the future. I believe that investors are best served through waiting for further technical breakdown prior to shorting this security. As can be seen in the chart below, I believe that technical breakdown will occur at a break of the current ascending trend-line. For this trade, I believe that a stop should be placed at the most recent high. This will protect investors in the event that price reverses its decline. In order to capture profits, I believe that investors should trail their stops by setting their exit point at recent highs as the trend continues its downward momentum.

(click to enlarge)

Timing

Within the markets, timing can be a very significant variable. Investors may ultimately be correct in their fundamental framework, but lose capital due to a sloppy entry or exit. In order to best time this investment, I have studied the monthly returns of Intel for the past 26 years and found some very interesting results, which may influence this trade. Specifically, Intel tends to rise in February (57% of the time) and decline in March (53% of the time). I see it as entirely possible that these results will continue in the future due to the fact that, technically speaking, we are due for a few more weeks of gains, followed by a period of decline as price hits technical resistance established in October of last year. Specifically, I believe that investors should strongly consider shorting in March if price slows its temporary gains throughout the remainder of January and February.

Source: Shorting Intel Could Be A High-Probability Trade