We interrupt the debate over the technological magnificence of phones and tablets to report that once again Intel hit the ball right through the clouds into the stratosphere.
While the press focuses on which commodity device, with what low-margin chip, is going to get what percent of the the hand held market..... news flash.... Intel kept selling lots of powerful, high margin chips to the people who are building content and deploying it over “the cloud”. That is a secular trend that is likely to continue perhaps even longer than the life-cycle of the current hand held device technology. Also, they continued to invest in the best chip production capability in the universe, use out-of -this-world engineering talent to re-architect their product line with sandy bridge, and amass lots and lots of cash for a rainy day. While it is frustrating that Intel's hand held strategy is not as mature as many investors would like, it seems very likely that Intel has the technical capability and cash to build and/or buy the capability to be the low-cost produced of commodity chips for hand helds at some point in the future. So when this investor stares into the clouds he continues to see dollar signs in a long position with Intel.
Time to get my head out of the clouds (that was the last pun...I promise) and think about ways to manage a long position in Intel that has been built at an average cost of around $20.
Let's first look at the fundamentals. Earnings for 2010 were $2.05. Management seems to believe 2011 will be better than 2010. A zillion analysts will be cranking out estimates for 2011, but let's just use some common sense and increase it by 8% to get to $2.20 for 2011. If you feel Intel deserve a normal market multiple of 15 at some point in the next year that is a stock price around $33. If you feel Intel is too big to get that type of multiple and want to use a much more conservative 12, that is a price target of $26+. That is 20% up from here. Oh, and by the way, there is a 3 % dividend that is probably more secure than most sovereign debt.
Technically, the 52 week high is $24 and there is chart resistance (which hopefully will become support) around $22.
Intel is such a large, widely held stock it is unlikely to streak towards $26 so holding this position will require some patience. While waiting for Intel to drift higher, the situation seems ripe to try to enhance returns with some option strategies. My mid-term assumption is that it is reasonable to accumulate Intel under $22 and lighten-up on the position around the $24 level.
Short term options plays
- My portfolio was short some $21 Jan puts that were sold for $.40 just before the holidays. As fast money “sold on the news” this morning, I rolled these over and up to be short Mar $22 puts for a credit of $1.20. That commits me to buying Intel at $20.80 well below the target acquisition price . However, more likely opportunities to cover this position at a nice short term profit will present itself in the coming weeks.
- If the stock drifts towards $23 in the next weeks. I would plan to sell $24 calls against a portion of my long position.
We now return you to your regularly scheduled programing on the phone and tablet market just in time for Apple's earning next week.