A bond is a debt certificate and a stock is an equity certificate. Before an investor buys a bond at par he should ask "What can go wrong?" If everything goes right he will only get back an interest rate of return while holding the bond plus his principal on the bond's maturity date. But if things go wrong he will be stuck with a loss; therefore he must avoid risk. With a stock it's different and when determining its suitability as an investment the investor should ask "What can go right?"
It is the successful assumption of risk that produces significant investment gains in the form of dividends and/or capital gains. (1) The dividends I receive as an investor are those declared by the company's management. Therefore, I need to know about the merits of the corporate development program that make dividend payments possible; those merits also affect the way the investment community (aka Mr. Market) prices the stock. And (2), when things go right the capital gain (or loss) I achieve results from a favorable (unfavorable) response by Mr. Market and the price at which I am able to sell it.
Mr. Market is the adjudicator who re-prices the stock daily and he doesn't ring a bell when the price is topping or bottoming. Therefore, (3) due diligence dictates that I rely on both fundamental and technical analysis when making investment decisions: the former tells me "what" stock to buy (or avoid) and the later tells me "when" to buy or sell it. Neither discipline can provide all of the answers for picking winners in the stock market; but the two together can be better than either alone.
Fundamentally, what can go right with Intel (NASDAQ:INTC)?
I would like to write about things that are going right with the subject company, but I am compelled to focus on things that are going wrong. When I was a student at the Wharton School more than 50 years ago, I had a professor by the name of Julius Grodinsky and we used his book "The Seeds of Latent Obsolescence" as our textbook. In one of his classes he spoke about the significance of the recently introduced semiconductor, its potential effect on vacuum tube technology, and why the likes of Sylvania and Philco were in jeopardy. As usual his lecture had good educational value and those companies soon went the way of the dodo bird.
In the 1930's the professor was the first to say that railroading was a declining industry and he was severely criticized by investment bankers because back then the railroads were considered blue chips and the backbone of the economy. But Grodinsky was correct in his assessment and railroading declined in importance as the roles of automobiles, trucks, and airplanes expanded. In retrospect the reasons for such transformation are always crystal clear to all. But before everybody can see one man has to be a visionary; the professor was the one man on occasions other than those cited.
It appears that the "seeds of latent obsolescence" are sprouting at this point in time and investors should not dismiss them lightly. Look what is happening with the likes of Intel, Dell (NASDAQ:DELL), Hewlett-Packard (NYSE:HPQ), Advanced Micro Devices (NASDAQ:AMD) and other companies competing in the personal computer space. DELL and HWP are major producers of PCs and they are forced to defend their turf (hence the loss of pricing power). AMD is sustaining big operating losses, cutting some 1500 jobs, and its survival is questionable. To a much lesser extent than those companies, INTC's sales and earnings are being adversely effected but it has the option to participate in the growth indicated for tablets and is moving in that direction with product introductions and alliances with the likes of Google (NASDAQ:GOOG).
The role of the PC is declining as smartphones and tablets become more pervasive due largely to their mobility. And the tablets should get a big boost in functionality when Microsoft's (NASDAQ:MSFT) much delayed Windows 8 is launched. That will make them even more competitive with PCs. Personal computers will continue to be used for a long time to come but their role will likely be diminished. One thing is certain. If competition is the stimulant that prods management to work harder on their corporate development programs, the executives of the companies in the PC space need have no fear of being under-stimulated in the years ahead.
INTC recently released its operating results for Q3: The PC Client Group accounted for about two-thirds of total revenues and such were down 8% from the year ago level. The Data Center Group's revenues were up 6% while its Other Architecture Group was 14% lower. The gross operating margin was 63% and management expects it to be about 58% in Q4. Earnings per share of 58 cents were down from 63 cents a year ago. Such earnings were $2.39 last year and a survey of 48 analysts shows that they are estimating share earnings of $2.13 for 2012 and $2.00 for 2013 (the high estimate for next year is $2.66 and the low, $1.60; so there are bulls and bears among the analysts).
The dividend was increased at the beginning of Q3 (that has been the pattern in recent years) to 23 cents from 21 cents. At the current price of 21.25, the stock is priced at 10 times this year's consensus earnings estimate and 10.6 times the estimate for 2013. The current dividend yield is 4.3%. The prospect for annual dividend increases is good because the company's free cash flow continues to be robust and it is currently in the process of buying back shares to the tune of 1.2 billion dollars. It is conservatively capitalized with a debt to equity ratio is only 14%.
With regard to the what-can-go-right question that I am addressing, I conclude that of all the companies being adversely affected by events taking place in the PC space at this time, Intel will fare best in the years ahead. It has already launched products directed at the tablet market and in Q4 some of its plants will be retooled to produce new product lines. INTC has technology, facilities, and financial resources not available to many other participants in the PC space. In effect, I am "betting on the come" by being bullish on the company at this time.
Technically, what can go right with Intel ?
Let's look at the chart I constructed from data in my workbook:
(1)The bold black line on top is price and the bold pink line below it is relative strength. (2) The dotted lines are moving averages and there is a set of those for price and a similar set for relative strength; they are used to define trends and reversals. (3) The five sets of gray parallel lines that frame the stock's price action are 22-day trading ranges and their progression shows how the trading range shifted during the 110 days charted. And (4) the four wavy blue lines that straddle relative strength are Bollinger Bands and they are used to detect overbought or oversold situations. Any one of the items listed as (2) to (4) is independent of the other two and could be cited as a valid technical indicator for buying or selling the stock.
The relative strength line showed a negative reversal of strength about 77 days ago and the stock has been a laggard vis-à-vis the market since then. The price line showed a negative reversal of strength about 44 days ago and it is still below its set of moving averages. The price of the stock will continue to decline as long as it remains below those averages. And, of course, the stock will continue to underperform the market until its relative strength shows a positive reversal relating to its averages.
Therefore, I choose to avoid the stock at this time and advise others to do likewise. When I am buying a stock I want the bottom of the price line to be behind me, not in front of me. There is no current indication that the bottom is in or imminent but when I see that is happening I will be a buyer of the stock. Furthermore, we are approaching the end of the year and since the price is at its low point for the year, there could be some tax loss selling to come during the next several weeks.
I will continue to follow the company and update my price chart daily. And when a progress report is needed as a follow-up to this article I will write it. The downtrend in the stock's price has got to end sometime because INTC's fundamental merits are stellar. All investors want to buy low and sell high. They may get a chance to buy this good quality stock at or near its low in the not too distant future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.