I am not usually a fan of buyback programs, especially not as a reason to chase a stock. Intel (NASDAQ:INTC) announced this week that it intends to buy back $10 billion worth of its own stock. This may be a reason to start buying into INTC stock for of two reasons. First, it’s cheap and recovering so investors would not be chasing it. And second, I think the intent of the buyback from management is to project confidence in the company’s future. You don’t buy an asset unless you believe it will be improving, so they may have good plans forward.
Usually there is a stigma that comes with buybacks because it could suggest that its managers have no better ideas than this. Case in point, you never see Amazon (NASDAQ:AMZN) doing this because it invests every penny into future businesses.
Intel here is trying to align the Wall Street risk profile for the company with the reality of its position among investors. Simply put, there is no respect for this formidable company especially if you compare it to Advanced Micro Devices (NASDAQ:AMD) and Nvidia (NASDAQ:NVDA).
I can’t fault the critics for not liking it because management has been very disappointing for a long while.
INTC Stock Has a Ton of Value
I like the underdog, and right now, all eyes are focused on AMD and NVDA stock. I want to bet that INTC stock will make a comeback, but I don’t expect a very well defined explosion, so I will need patience to profit.
The best thing that Intel has going for it is how little value investors give it now. It has a trailing-12-month price-earnings ratio of 8.9. Compare that to 156 and 91 for AMD and Nvidia respectively. It looks like there is a lot of room to grow.
Speaking of growth, the current INTC stock price only has three years worth of sales baked into it now, that is four times cheaper than AMD and nine times cheaper than NVDA. Clearly INTC needs a catch-up trade because it also pays a 2.7% dividend to boot.
On paper, this is the slam-dunk chip stock to buy. But as they say, price is truth and so far the investors are not buying it. This makes it a perfect dark horse to bet on for the next two years at least. This is not meant to be an overnight win so I consider this an investment not a trade. The idea is to stash the stock away and forget about it for a while.
There are other ways of mitigating the risk, and the easiest thing to do is to only take a partial position. This would leave room to add on more dips. This is important because there is extrinsic risk from the stock market in general being so high in the face of tough times.
There Is More than One Way to Get Long a Stock
My favorite way to build room for error while taking bullish positions is to use options. There I can pretty much define a risk level that suits my tolerance. Moreover, I can make it so that I don’t even need a rally to win. In this case this is important because INTC stock trades more like a bank than a fast-moving chip stock. It has tons of value, so the dips should be shallow, but it can’t sustain a rally to save its life.
To get long the traditional way, investors would need to buy shares at $49 with absolutely no room for error. Then they would need a rally to win. Instead I prefer selling the Jan $43 put and collect $2 for it. This is my maximum profit if it stays above my strike. Else I own the shares at $43 and I break even at $41. The advantage here is that I can still profit even if the INTC stock falls another 13% from here. The bad thing about this strategy is that I have a limited upside potential. But to fix this problem I would also buy Intel April 2021 $55 calls or call spread. This would add the upside element back in and make the entry cost much cheaper than a simple buy order.
Timing is important, and for this one it’s best to delay buying calls until after the bulls break out from $52.30. There is a giant gap there and it usually takes some work to get through it. I can start by selling the puts now and then add the upside call position later.