Intel’s (NASDAQ:INTC) stock has risen sharply since reporting results. Now recent options trades suggest the stock may continue to increase by as much as 9%. The technical chart is also suggesting the stock breaks out and rises as much as 11% back to its previous high in June.
The valuation for the stock continues to be very attractive during a time when the semiconductor sector has seen a significant rebound off the lows as measured by the iShares PHLX Semiconductor ETF (SOXX). The ETF has risen 17% since the beginning of the year compared to Intel's rise of just 9.5%. It's a big divergence from the ETF, of which Intel accounts for a 7.8% weight.
I had noted in my article on Jan. 22 Intel's Stock May Jump After Results and could climb to roughly $52.50 should it break out and rise above $49. Additionally, I had noted bullish options activity suggesting that the stock could rise to $51.50.
Now the call options for expiration on April 18 at the $55 strike price have seen their open interest levels climb by 7,000 contracts to a total of nearly 33,500 open contracts. For the buyer of those calls to earn a profit the stock would need to jump to roughly $55.50 by the middle of April. The open interest represents a total dollar value of about $1.7 million.
Additionally, the options imply that the stock could rise or fall by roughly 8% by the April expiration from the $50 strike price, based on the long straddle strategy. It would place the stock in a trading range between $46.25 and $54 by expiration. However, what's most interesting is that the number of calls outweighs the puts by a ratio of nearly 3 to 1, with 34,000 open call contracts to just 13,700 open put contracts. A buyer of the calls would need the stock to rise to $52.65 to break even.
The technical chart also is pointing to a higher price for the stock as it approaches resistance at $52.50. Should the stock rise above that level of resistance it is likely to continue to increase towards its previous highs around $57.00, an increase of 11% from its current price of $51.30.
Also, the chart shows how the relative strength index has reversed trends in recent months. The RSI had been in a steady decline since June when the stock peaked. However, that trend broke in October, and it has been steadily rising. It would suggest that bullish momentum is moving into the stock.
Because the broader sector as measured by the iShares Semiconductor ETF, Intel's valuation has become more attractive vs. its peers. When I last wrote the average one-year forward PE ratio of the top-25 holdings in the ETF was 12.5. Now, according to data from YCharts, that PE ratio has risen to nearly 14.8. Meanwhile, Intel's PE has increased to 10.8 from just 10.7. It means that the stock is trading at an almost 40% discount to the group average versus a 16% discount just a month ago.
Some of the stock's discount is attributable to Intel's dire outlook for 2019 with analysts consensus estimates forecasting a decline of almost 2% to $4.51 on flat revenue of $71.11 billion.
Intel does face many challenges this year as competition from companies like AMD (AMD) continues to get stronger. Also, the company has had numerous problems manufacturing its 10nm and 7nm chips, and it's hard to gauge when and if another issue like these two creeps up in the future. However, for now, it would seem that momentum is going Intel's way, and that may very likely means the stock still has further to climb.
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Mott Capital Management writes short-to-medium-term focused articles on where stocks may go. We do not write articles on investing for the long-term. In a typical article, we will tell readers where Mike thinks a stock may go over a short period of time. This allows readers to understand why a stock may be rising or falling based on an analysis of fundamental, technical, and options trading activity.
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