Today’s topic is a throwback to simpler times when Wall Street was still mostly run by humans. Now it’s a bunch of machines running artificial intelligence and algorithms outfoxing us warriors who are still doing it old-school.
The three companies in focus today are likely to be boring. The new breed of investors would rather chase a pie-in-the-sky than a full dish of current facts. Our picks could be the comeback stocks to buy for 2021.
They all will have one thing in common: great fundamentals but lackluster management styles. Leadership may even seem incompetent at times, which spells future potential. By that I don’t mean upside business potential, but rather the possibility of a resurgence in investor interest. They were once beasts in their field and now they are almost put out to pasture.
These are extreme statements that could insult the stocks and their fans. I am being borderline offensive on purpose to illustrate the lack of love and respect that they get nowadays. It is not a surprise to learn that these comeback stocks are down 35% to 50% from the highs. This is in spite of markets breaking records.
In the beginning of every year I pick a few long shots to be comeback stocks. These three are candidates but for slightly different reasons.
Comeback Stocks of 2021: Intel (INTC)
For a brief stint, Intel stock looked like a star in the summer of 2020. It all came crashing down as management disappointed with its results. The stock gave back the whole rally and another 10% from the low to boot. It mounted another effort in the fall, but that too ended in tears. In the process Intel stock went back to base and is teetering near it still.
What makes this worse is that the stock markets are making new highs. It is tough to watch a once-great stock flounder. From a trading perspective it seems that price is following technical rules perfectly. Both rallies ended once price filled the open gaps to the penny. Therefore, part of the thesis will be based on charts.
The fundamentals of Intel are solid but the danger comes from its two main competitors. Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD) turned out to be fierce foes. They are out for blood and they have the innovation to back it up.
Intel is still sitting on its laurels because of the market share it once had. In the age where computers are lightening fast, technological changes are even faster. Once the tide switches there will be no turning back.
I’ve seen some sparks in their marketing efforts but it won’t be easy to sway investors. Wall Street will need concrete signs of life that at least they want to compete with the big boys. It is not a coincidence that it is more than 10 times cheaper that AMD or NVDA. You get what you pay for and it is definitely the bottom of the barrel.
So why bet on a turnaround? It’s too close to a disaster scenario and my bet would simply be that it won’t happen. If you eliminate one outcome, the other will become more likely to happen. Between a crash from these levels and a rally, I think an INTC stock rally is more likely.
IBM (IBM)
This one is the poster child of under-achievement in my book. For years I have been vocal about the need for a new CEO. That didn’t stop me from trading the upside potential in IBM stock. I shared a few good entry points and hopefully we can repeat performance. Finally last year Ginny Rometty stepped down from her post. The problem is that they promoted her replacement from within. I say it’s a problem because so far the tune has not changed, but am willing to wait.
IBM continually promises the moon and under-shoots with their results. In the last four years, instead of growing, revenues shrunk. Net income for the last 12 months is 30% smaller than 2016. Luckily this means that it has reasonable valuation and for good reason. In spite of that, I think they will end up succeeding in joining to new era of tech.
Technically, the bulls have an opportunity just above the current price. If they can sustain a rally for a few days they can recover $150 per share. There will be a lot of resistance in between here and there but all they need is a spark.
Management has all the elements for success, they just need to concentrate on what’s important. I don’t mean what’s the best business course of action. What I think is more important here is to give investors what they want. Fans of IBM stock simply want to see their beloved stock soar again. For this to happen management will need to speak to the contemporary talking points. This includes buzz words like the cloud. I don’t need to hear more about how their AI is doing great.
Perception is important on Wall Street and it would be good if management would help its investors. They stuck with it through the years and it’s about time the company throw them a bone. General Electric (NYSE:GE) did it last year and this year it could be IBM. I mention GE because it was one my 2020 bets that paid off immensely. IBM is due for something like this and soon. I think investors have waited long enough.
AT&T (T)
There is a theme happening now and that’s the mega rally in gold and bitcoin. This is a byproduct of how loose the central banks policies are, and not just in the U.S. They were already extremely loose prior to the pandemic and now they have gone off the deep end. Add to it that now the government is adding trillions in stimulus and we have a situation brewing.
The Fed has not yet exited the quantitative easing (QE) that it started after the 2008 financial crisis. They tried in 2018 and failed miserably. Now it’s a free for all and as a result there is no fixed income anywhere.
As a result, AT&T stock has an edge over a lot of stocks. It currently has a 7% dividend yield. As long as they have that, then there is a great incentive to own the stock.
In spite of its failed rallies, T stock has maintained a solid floor. Through thick and thin prices have bounced off the $26 zone in spite of tough conditions. Few can argue that 2020 wasn’t a difficult test and AT&T passed. There won’t be another one like it for a long time, if ever. The company does have a considerable amount of debt. But as long as they are able to generate cash to service it I bet the dividend remains in place.
TINA (there is no alternative) is an acronym that describes that investors have no other alternative than buy U.S. Bonds. I think it applies to stocks like T even better. The 10-year U.S. even after its recent rally barely pays 1%. AT&T’s is five times better without a lot of extra risk. Of course stocks are not guaranteed but nothing in life is. As aggressive as governments have been, I’d argue that the risk curve has been bent out of shape forever.
AT&T still generates a ton of net income with a reasonable price-to-earnings ratio of 19x. Most importantly, current investors have realistic expectations of the stock since its price-to-sales is under 2x. When forecasts are not lofty there is little room to the downside.
If the markets remain bullish, then T stock could swing into the $31 resistance by the end of January. If the bulls somehow can get above that then they could spark a rally to $35. Meanwhile, investors can collect the fat 7% reward.
Out of the three comeback stocks to buy today I favor Intel. It has the most focused opportunity on the charts. It is also clearly the worst of its class of three. Any progress can then quickly become clear.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
