Shares of Intel (NASDAQ:INTC) may have finally found their footing after a punishing pullback. Intel was crushed following an earnings beat as the company announced a delay in chip production. Certainly some of the drop was warranted given the news, but the reaction has now come too far, too fast. The fundamentals and technicals are both pointing to a bottom in Intel. Time to be a buyer of an undervalued and oversold INTC stock.
InvestorPlace Markets Analyst Luke Lango just published an outstanding analysis on INTC stock from a fundamental and competitive viewpoint. He notes that while Intel will feel some definite short term effects from the delay in the 7 nanometer chip, the concerns are now overstated.
Longer term, the stock should do just fine, especially given the comparatively attractive valuations following the recent drop in Intel.
Intel’s Valuation View
The trailing price-earnings ratio is now under 9 while price-sales is at just 2.68. Both of these stand at the lowest levels since 2013. Other fundamental metrics such as price-book and price-cash flow are at similarly discounted multiples. Shares are looking dirt cheap at current levels.
It is important to also remember that Intel did beat earnings on both the top and bottom line when the company reported on July 23. This marked the fifth straight quarter of earnings beat for INTC with an average earnings surprise of 15%. Yet shares have literally gone nowhere in that time frame. This combination of continued earnings improvement with no stock price improvement makes INTC stock is a compelling value at these prices.
Technical Take
INTC stock reached extremely oversold readings on a technical basis before showing signs of improvement. The 14-day RSI hit nearly 20 but has since turned higher. MACD broke below -1 then firmed. Momentum is at similar negative levels seen at the Covid-19 crisis lows.
Intel is trading at a massive discount to the 20-day simple moving average as well. The prior two times Intel was at such levels of pessimism on these technical indicators marked significant intermediate term lows in the stock. There is major support lurking at the $45 area.
Source: The Thinkorswim® platform from TD Ameritrade
Intel stock is also getting to extremes on a comparative basis.
Normally Intel is highly correlated to the VanEck Semiconductor ETF (NASDAQ:SMH), which makes sense given that INTC stock is the third largest component of the ETF. Lately, however, that correlation has broken down considerably. Since mid-June SMH has continued to rally to new highs while INTC has neared the recent lows.
Look for this divergence to begin to converge, with Intel being a relative outperformer to the rest of the semiconductor stocks over the coming weeks.
Source: StockCharts.com
The recent carnage in INTC stock has also served to make the dividend yield even more enticing for income investors. The current yield now stands at 2.72% which is nearly five times the 0.56% yield on the 10-year Treasury. The payout ratio of just 0.28 is the lowest level of the past decade and means the dividend payment is very safe. A dividend hike is a likely scenario as well.
Intel has raised the dividend in every year but one since 2003.
The above-market yield with a low payout ratio and a history of steady dividend hikes should serve to staunch any major downside in INTC.
How to Trade INTC Stock
Although it is certainly a solid buy at current prices, the options market provides a way to collect premium now while waiting to be a buyer at lower levels.
Selling the Jan $40/$35 put spread for an 80-cent net credit brings in money upfront while positioning to be a buyer at lower levels. Maximum gain on the trade is $80 per spread with maximum risk of $420. Return on risk is 19% or 41.61% annualized. The short $40 strike price provides a 16.71% downside cushion to the $48.03 closing price on INTC stock.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a weekly option and volatility newsletter can visit the Options and Volatility Newsletter website.
