Why Intel's Stock Is Poised To Surge
Summary
- Intel's stock has been stuck below $49.
- Options trade suggests the stock rises.
- The stock's valuation is the cheapest in years.
- This idea was discussed in more depth with members of my private investing community, Reading The Markets. Start your free trial today »
Intel Corp.'s (NASDAQ:INTC) stock may be ready for a technical breakout. It could result in the stock surging 10% or more, should the stock rise above $49. Should that happen, it would trigger a breakout.
Options traders are also betting the stock rises 11% by the middle of February. We talked about this in our premium room on November 28. One reason investors may be bullish on the stock is its cheap valuation versus its historical comparables and its peers.
Technical Breakout Nears
The stock is currently trading below a wall of technical resistance at $49.00. The stock has attempted to rise above that price several times and has failed since the beginning of November. Should the stock finally rise above that level of resistance, the shares may go on to advance to the next level of significant resistance around $52.50 from its current price of $48.
Additionally, there is a gap in the chart which was created in the middle of August. The stock may also be attempting to "fill the gap," rising back to roughly $52.50. Further, there is also technical reversal pattern which has formed in the chart called a falling wedge. It too would suggest the stock may rise.
The relative strength index is also firmly trending higher and indicates that bullish momentum is moving into the stock.
Bullish Options Bets
The $52.5 call options for expiration on February 15 have seen an increasing level of activity over the past couple of days. Open interest levels for those calls have risen to 14,400 open contracts. With the calls trading for $1 per contract, to earn a profit, a buyer would need the stock to increase to $53.5 by expiration, 11% higher than the current stock price.
Cheap Valuation
There are plenty of fundamental reasons why Intel may rise from its current price. The first is its valuation, with the stock trading at lowest one-year forward PE ratio in years at less than 11.
Fundamental Chart data by YCharts
Earnings estimates for the company have been steadily rising all year. Just since the middle of October, estimates for 2019 have increased 7% to $4.54 per share. Additionally, revenue estimates have also climbed 2.5% to $73.2 billion. The rising earnings estimates are one reason why the earnings multiple has fallen so far in recent months.
INTC EPS Estimates for Next Fiscal Year data by YCharts
Versus The Sector
According to data from YCharts, even when comparing the stock to other chip companies, the stock is among the lowest in its valuation. Of the top 25 holdings in the VanEck Vectors Semiconductor ETF (SMH), the average one-year forward PE ratio is 15, with a median of 11.
Rising Margins
Interestingly, Intel is among the companies with the highest gross margins in the sector last quarter. Intel's margins were at 64.5% versus an average of 56%. Gross margins are a critical metric investors use to value chip stocks. Gross margins for Intel have been steadily rising over the past year and are their highest levels since 2016.
INTC Gross Profit Margin (Quarterly) data by YCharts
Risk
There are plenty of risks still with the stock as the company continues its search for a new CEO and works through the delay in the production for the 10nm chip. Additionally, uncertainty around the pending U.S./China trade also weighs on the stock and the broader chip sector.
Intel has had a fantastic comeback over the past year. Should the company continue to outperform and deliver strong results than the stock should be rewarded in quarters to come.
Disclaimer: Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results
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This article was written by
I am Michael Kramer, the founder of Mott Capital Management and creator of Reading The Markets, an SA Marketplace service. I focus on long-only macro themes and trends, look for long-term thematic growth investments, and use options data to find unusual activity.
I use my over 25 years of experience as a buy-side trader, analyst, and portfolio manager, to explain the twists and turns of the stock market and where it may be heading next. Additionally, I use data from top vendors to formulate my analysis, including sell-side analyst estimates and research, newsfeeds, in-depth options data, and gamma levels.
Disclosure: I/we 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.