When I first got into the industry Intel was one of the most exciting stocks around. It was an exciting company, too, with co-founder Gordon Moore's legendary "law" that predicted processor speeds would double every two years. At the time nobody knew just where all that technology would take us and it was a thrilling era to live in. There were countless Jetsons-style fantasies. A lot involved hoverboards.
Today, Intel (INTC) is a different story. Despite that, I wonder how many people still think of Intel as a classic tech company, a company with all of that tech baggage. You know what I'm talking about: the allure of of high growth, the wonky justifications for ludicrous earnings multiples, the promise to re-shape the future.
The bottom line is that they're much more like a utility or a traditional manufacturer and have been for quite a while. The make stuff that is integral in our daily lives, the kind of stuff American Life doesn't really work without.
I mention this because it's broadly indicative of the type of equity investment that I like. Simple, unloved, and low-risk. The stock has gone nowhere for over a decade but don't let that chart fool you. It hasn't been because they've lost money or blinked into irrelevance the way so many technology companies have. Intel has just finally grown into its multiple.
Now, I understand that's a terrible looking chart. There are a lot of investors out there that won't buy a stock unless the chart looks good, unless the trends are rising and the support & resistance levels are in the right place. That's cool. Plenty of other stocks suit those criteria.
But let's forget that chart for a moment. Let's forget about the storied path that Intel has traveled and let's focus on the here and now. Let's also look out through the next decade at its prospects as an investment; this is not a short-term trade.
At 10 times this year's earnings, Intel is cheaper than Exxon (XOM), Johnson & Johnson (JNJ), or Wal-Mart (WMT) . It's cheaper than Con Ed (ED), one of our strong dividend staples! Wall Street, why hath thou forsaken Intel? Are there still people out there that own Intel at $80/share and grumpy about it? Is the market worried that someday the world won't need microprocessors anymore?
Intel carries rather modest risk:
- Their balance sheet is immaculate. $14 billion in cash and virtually no debt. So they're not going to blow up and their dividend is safe. Plus they have dry powder should they feel like getting acquisitive.
- They have a dominant position in the semiconductor industry. They dwarf chief-rival AMD in pretty much every category.
- We're in the midst of a major PC upgrade cycle right now, but that won't be the last we see in the next 10-15 years. If I've learned one thing from a lifetime of working on computers it's that these things don't last forever.
- There are no major threats to their business model. Computer processors are in just about everything we use nowadays, not just PCs. A lot of mobile devices nowadays are thinnish clients that keep most of their data in the cloud. Well, "The Cloud" needs a whole lot of processing power. Demand for what Intel makes isn't going anywhere and that demand is more inelastic than a lot of people might think.
And they pay a 3% dividend for cryin' out loud!
Here's the deal: Intel will be a company that will, at the very least, grow at GDP plus inflation. That plus the dividend yield is the benchmark rate of return for the market over the long, long run. By definition, the market cannot grow more than that. The rest of the variance is attributable entirely to investors' willingness to take risk. That manifests itself through expansion and contraction of the multiples investors are willing to place on one dollar of earnings. I don't want to veer off on a tangent, but in the last couple of decades that number has been much higher than it historically has. It doesn't take long to connect those dots with the super-compressed interest rates of the Greenspan/Bernanke era. Investors are forced to take more risk than they historically have.
There's a lot going for Intel that could carry them above that modest target. Much has been made of this epic demographic shift that's taking place in China, the tens of millions of Chinese that are moving from the impoverished interior for a chance at a wealthier future in one of the urban centers. That has been the fuel for the construction boom over there. At some point I'm sure those people will want to buy computers too.
Consensus estimates have them growing their revenue by about 6-8% next year and continued modest growth after that. I have little faith in consensus views, especially when they concern specific details. But there's no question they have the direction right. Intel is definitely going to keep growing and is definitely going to do it at a rate greater than GDP. So yeah, I think a company like this outperforms the market over the coming decade.
That's not to say that the market won't be lower in 2020 than it is today. I think the odds of that small, but larger than many think. Regular readers know that our belief is that the U.S. is trying to emulate Japan's playbook.
Anyway, if you want to get tactical about it, Intel is the kind of stock I'd look to acquire on a big dip. There's no rush in owning it tomorrow. Seriously. It's not going to double in the next year or two. So you can wait until the market falls into a booby trap or has one of those deflationary, existential panics. Don't worry, we'll get plenty of these in the coming years.
We have a little plaque in our trading room that just says "Patience". I'm a practitioner of Jim Rogers' famous quip, "I just wait until there is money lying in the corner and all I have to do is go over there and pick it up. I do nothing in the meantime." Intel trading back around $15-17/share would certainly qualify as money lying in the corner. If that happens, walk over and pick it up!
People lose money in the market every day, and I think the wrong strategy is trying to make it back as quickly as possible. I think investors are much better off trying to minimize the probability that they'll lose money in the first place and should that unfortunately happen, wait patiently until the right investment comes back along.
Intel satisfies that first criteria, the need to minimize downside risk. It's cheap now and its prospects are good, but for some reason the market hates it and I think it will get even cheaper and have even brighter prospects.
It seems like every newsletter we talk about how the most important factor when it comes to investing success is understanding who you are. That might sound a line we stole from a cheesy self-help book, but this is Real Deal Wisdom. Know who you are and build an investment strategy to match. You can spend a few hours poring through some company's financial statements or you can spend a few hours on an introspective journey. We suggest you do the latter before anything else. Come back in a couple years and you'll thank us.
I'm boring. I like things that are boring. I like investments like Intel that are boring. As I reflect on my life, the boring investments have -- by far -- been the most successful. It seems like every time I chase something hot and sexy I wind up losing money whether it was an investment or, uh...something else. I haven't the first clue about how to chase things that are hot and sexy. I spent my college years studying economics and reading science fiction.
But I kept my eyes open and I saw that some people were naturals when it came to that sort of thing. Consider some of the great commodities traders, guys like Paul Tudor Jones and John Henry. Those guys know who they are and they built bold, flashy investment strategies to match. It was one of the key principles behind their magnificent success.
If what you see is risk-aversion, a big-picture outlook, and a willingness to be patient, then put Intel on your radar screen.
If what you see is a love for risk and a hunger for excitement, how on earth did you make it to the end of this article?!
Disclosure: No positions