The S&P 500 Index (SPY) gained about 15% in 2012, and it is up another 9% for the first three months of 2013. Those are impressive returns, especially considering how little cash earns in "risk-free" assets. While many stocks are now overbought and in some cases overvalued, there are still pockets of solid value in stocks that have not fully participated in the rally. Intel Corporation (INTC) is one of those stocks and it appears very undervalued.
Great investors like Warren Buffett often focus on buying out-of-favor stocks that are cheap, but still have solid long-term fundamentals and great brand names. Intel fits this profile and investors who look past the pessimistic view that some have on this stock, could end up with significant gains. CNBC's Jim Cramer recently turned bullish on Intel shares and a "Lightning Round" summary states: "Cramer thinks this company will soon surprise the Street. He's a buyer." Here are a few reasons why Cramer is right to be bullish on Intel shares now:
1) Many investors have sold out of PC-related stocks and declared the end for this industry. However, that view appears to be way too negative. Investors who were dumping PC-makers like Hewlett-Packard (HPQ) and Dell (DELL) near 52-week lows in 2012, did not have to wait long to watch Hewlett-Packard roughly double in value and for private equity firms to bid for Dell and send those shares much higher. These are examples that show investors could be taking a far too pessimistic view on PC-related stocks like Intel. These examples also show that buying stocks that many investors have given up on, due to low expectations, can end up outperforming very popular stocks.
2) Intel has seen smaller companies develop chips that have become popular for use in mobile devices. At the same time, mobile devices like smartphones and tablets have become increasingly popular. While Intel may have been slow to address this trend, it does appear to be getting increasingly competitive as it has designed specialized chips that use less power and are well suited for mobile devices. A recent Bloomberg Businessweek article points out why things could be about to change, it states:
Intel finally appears on the verge of giving all the ARM chipmakers-Qualcomm (QCOM), Nvidia (NVDA), Samsung Electronics (SSNLF), Apple (AAPL)-a run in the mobile part of the market. That means all of these companies will face Intel's manufacturing prowess and its relentless march toward better, cheaper chips.
3) Intel recently signed a deal to make chips for other tech firms. This could lead to a significant amount of new revenue and this type of business does not have the risk or expense of developing new products. It will manufacture "field-programmable gate arrays" or "FPGAs" for companies like Altera (ALTR). These chips are used in a wide variety of products. A recent Barron's article details why this news is significant and very positive for Intel, it states:
FPGAs are workaday chips found in everything from set-top boxes to MRI machines. The ones that Intel is producing will have unrivalled speed and power efficiency, but the larger significance of the deal is that it marks Intel's expansion from a designer of proprietary chips to a high-end chip foundry for customers willing to pay up for exclusive access to cutting-edge manufacturing techniques.
If Altera's new production advantage helps it to take shares from rival Xilinx (XLNX), more chip designers could come calling on Intel for foundry work, including big fish like Apple.
If all goes well, the "Intel Inside" days of personal computers could give way to a made-by-Intel model extending to all sorts of gadgets.
4) While investors are waiting for a higher share price, the dividend Intel pays makes the wait easy. It currently yields over 4%, and it has a history of raising the dividend; in fact, the dividend has doubled in just about six years. In 2007, the quarterly dividend was 11.25 cents per share, but steady increases brought it up to 22.5 cents per share.
Here are some key points for INTC:
Current share price: $21.75
The 52-week range is $19.23 to $29.27
Earnings estimates for 2013: $1.93 per share
Earnings estimates for 2014: $2.09 per share
Annual dividend: 90 cents per share, which yields 4.3%
Data sourced from Yahoo Finance. No guarantees or representations are made.
Disclosure: I am long INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.