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Mark Thomas has been a successful individual investor, trader, investment newsletter author and has been actively involved in the Financial and Securities markets since 1990. Mark currently is seeking a new opportunity in securities operations or analysis in Orange county, CA. Prior to his... More
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  • Intel Inside, The Bargain Bin! 0 comments
    Dec 27, 2012 3:39 AM | about stocks: INTC, QCOM, ARMH, DELL, HPQ

    At my stock trading alerts email service, I'm always looking for situations where I can have an informational advantage over other investors due to negative perceptions and herd like thinking. I have been watching Intel (NASDAQ:INTC) for months now, waiting to purchase it. I have been waiting as the negative consensus around the stock has built to a crescendo. As a very short-term investor I'm not usually attracted to value stocks that might take a couple months to turn around, even more so if the stock is in the technology sector which I have avoided almost my entire career. However in the last few years a trend has been working against a household name blue chip stock that has driven down the price of the stock to very, very attractive levels. The performance of the stock has been so bad, that literally right now no hedge or institutional investor wants it to show in their portfolio at year end, except for the true bravest longer-term contrarian value investors. Intel's stock right now is literally inside the bargain bin.

    I will tell you about the financials of the company and then I want you to ask yourself, if that was all you knew about the company: would you buy the stock? The company is one of the world's largest corporations. It dominates its market like few ever have in world history, especially in the ever changing world of technology. It has a quarterly dividend yield of 4.25% or 240% more than the current 10 year US Treasury yield of 1.8%. It trades at only eleven times future earnings or 12% below the average stock in the S+P 500 multiple of 12.5. The company is so financially solid; it just borrowed six billion dollars for an average interest rate of only 2.72% for over fifteen years. The company already had $3.25 billion in net cash on the balance sheet equivalent to $.75 cents per share which equals almost 4% of the company's market capitalization. After this new borrowing they, have $9.25 billion in cash or the equivalent of 9% of their market capitalization. It is pretty obvious they intend to pay a special dividend or fund a very large stock buyback which could reduce shares outstanding by almost 5% over time.

    Now I know what you're thinking, here we go again. This person is suggesting you consider buying Hewlett Packard (NYSE:HPQ) or Dell (NASDAQ:DELL), companies that are past their growth stages, now stagnant, in decline or in serious trouble. There goes some Wall Street guy who says buy this technology "value stock" that winds up being a "value trap" for your hard earned money. However sometimes you can find a diamond in the rough and that is what I'm talking about today. Before I tell you the stock, ask yourself; if this is all you knew about the stock, would you buy it? My answer to that question is that if the business isn't in a serious decline and that I thought the management could adapt or overcome its current troubles; yes I would buy it and buy it pretty aggressively. That is what I just did with Intel (INTC) making it one of my largest stock positions here at the end of 2012 and going into 2013.

    Of course when you're offered merchandise at a discount like this, there has to be something wrong with the company or other investors would not have such a negative consensus about the stock. I'm not saying the company isn't facing serious challenges in its core business. However I'm saying that at current prices those fears are clearly overblown and the price has more than overreacted to the business challenges and the valuation of the company is substantially below where it should be. I like investments with a very simple investment thesis to focus on. In this case it is that Intel got sloppy and has fallen behind in the growth areas of making chips for smartphones and tablets. Smartphones and tablets are where all the growth is in number of units sold. For a company like Intel who dominates 85% of the worlds' personal computer market, this is a position they aren't used to. One of the reasons this occurred is in mobile devices, the amount of power used is much more important. A company called Arm Holdings (NASDAQ:ARMH) focused on a line of chips with less power usage and now they are very big in the smartphone sector. The other big beneficiary of this trend had been Qulacomm (NASDAQ:QCOM) as they profit from a licensing fee from about 90% of the chips used by the largest sellers of higher end smartphones.

    What I just outlined is widely known and is now just accepted as a general consensus fact and that negative consensus is what creates the price opportunity in the stock. Now the consensus expectations going forward are so low and the price of the stock has come down so much, it is a bargain. In fact I think it is a wonderful stocking stuffer to buy for yourself or a family member. The first thing you have going for you by buying the stock is a 4.25% dividend yield. It is only eleven times my 2013 earnings estimate of $ 1.90. More importantly ay an enterprise value of only $110 billion, it is only 2.0 times annual revenue of $53 billion. By my estimate Intel's stock is worth at least 2.5 times annual revenue which would equal $26.50 which would be a gain of 25% from current prices. That is my 2013 price target but for now I like the stock going into 2013 as a beaten down blue chip stock where the expectations and price are so low, it should get some lift over the next one to two months. Technology stocks like this used to trade at three times revenue but I don't think Intel will probably ever achieve that high of valuation again. The only thing you have to believe is that Intel that has been around the longest, has the most talented people in the business and a new CEO to become positioned in mobile and tablets. It has paid to bet against Intel short-term all thru 2012 but now the time has come to bet on Intel to rise again.

    Disclosure: I am long INTC.

    Additional disclosure: For a Free 30 Day Trial of my stock trading email alerts please sign up

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