How To Trade 'Stagnant Intel'

Nov. 6.12 | About: Intel Corporation (INTC)

Although there is already a large amount of pessimism over shares of Intel Corporation (NASDAQ: INTC) that may get contrarian investors excited, it's difficult to argue that the company's financial data supports the theory that the company will be seeing much growth in the next few years.

Shares rallied modestly after the company posted Q3 2012 results on October 16th, which can be seen as a press release here (also see a written version of the conference call here).

Note that in the earnings report, we did see some positive developments. Q3 Revenue stayed essentially flat relative to Q2 at $13.5 billion, although this was a bit better than expected and technically gave Intel its best quarter ever. Earnings also improved quite dramatically, giving a non-GAAP EPS of $.60 - a solid 5.3% higher than Q2 EPS which came in at $.57. The shares probably would have performed a bit better following the release, but the company did stay quite cautious about the prospects of the PC industry going forward.

Stacy Smith, who holds a number of titles in addition to CFO, stated that the company is expecting a modest Q4 revenue of approximately $13.6 billion. The following quote also sounded a bit intimidating:

"As a result of weaker than expected demand environment, we are taking several actions. We significantly cut factory loadings at the end of the quarter and we will maintain low factory utilization rates throughout the fourth quarter. We expect these factory adjustments to help bring down our total inventory levels by approximately $0.5 billion."

Stacy Smith, Intel Q3 Results Conference Call

Although the financial data remains quite good, Wall Street retains its modest expectations for Intel's future. Following this notion, stock analysts are also giving quite neutral (or even bearish) guidance on INTC. The argument that Intel hasn't really gotten a foothold in the mobile chip market also remains very popular, dismissing the introduction of Atom this year.

The Intel situation is getting quite complicated, but can be boiled down into two major themes that could play out in coming quarters. The first theme is conservation, which means that INTC will retain its current position and reward shareholders with dividends or possible share buybacks later on as Wall Street predicts. This financially-focused version of Intel probably wouldn't make as much headway into the mobile space. Since the PC industry is their bread-and-butter, Intel would probably trade sideways for a long time.

The other major theme is "pivoting", which is a way to describe a potential strategy of sacrificing now for greater benefits in the future. If Intel focused more extensively on the mobile chip market, we would likely see some immediate deterioration in the company's financial data (particularly with operating margins) in hopes of attaining substantial revenue growth. This would address the big weakness that Wall Street uses to justify its neutrality on INTC, although it would put the company/stock at greater risk.

This article was made to show investors that the "Stagnant Intel" scenario, which assumes that INTC continues to trade mostly sideways, can still provide decent returns on the stock in the long run for individuals.

Anyone who expects INTC stock to stay flat for the foreseeable future can still look forward to two sources of income:

1.) Dividends. Intel is a ridiculously popular dividend stock, and still manages to yield 4.12% at its current price. There aren't too many companies that have Intel's financial security and impressive efficiency with a 4.12% yield, so consider this a major benefit.

2.) Covered calls. I wrote an article on October 5th (How To Amplify Intel's Returns Each Month) that described the strategy in greater detail, but it's really quite simple. Anyone who is holding shares of Intel can benefit by selling call options in the highly liquid INTC options market at premium prices. There is also the possibility that the option expires worthless, which happens on the third Friday of the designated month of the options contract.

On October 5th, I mentioned specifically that October $23.00 Call Options were particularly attractive for a covered-call strategy. Anyone who took the advice and sold calls at that price would have made 1.57% returns (minus commission) by their expiration on October 19th at virtually no risk.

Although Intel's dividend is sizable, one can expect covered calls to generate more than 4.12% per year, even with some mistakes along the way. This is why I think "Stagnant Intel" can still provide appreciation potential for your portfolio.

Here is a screenshot I took of Intel's latest options (from November 6th, 2012 via Scottrade)

(click to enlarge)Click to enlarge

Anyone who is just starting their position in INTC would probably opt for writing $22.00 November calls, which gives an immediate $.43/share premium. Someone who started on October 5th with my article would probably consider $23 calls, although it'd be more effective to wait for better prices. Covered calls are far from perfect, and should only be used when the time is right.

Ultimately, I hope this article helped anyone who was wondering what to do about Intel. Whether you already own shares that you may have been considering selling, or whether you are just curious, just know that it's possible to make money off of Stagnant Intel.

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.