Name That Trade: $INTC One Way To Play For Second Half Bounce

In today’s MorningWord, Dan detailed his thoughts on INTC’s report and guidance:

INTC is down ~5.5% in the pre-market, giving back the last 2 weeks’ gains, which in my mind probably places it at about fair value when you weigh: SPX at 5 year highs, current low expectations, cheap valuation, large buyback in place, a dividend yield greater than 4% and the potential for investor enthusiasm centered around the hiring of a new CEO in the coming months.

Along those lines, we wanted to highlight a longer-term trade structure that makes sense for those who view INTC as compelling value here.  This is not a trade we’re doing ourselves today, but it’s a common trade structure among long-term investors who want to enter a stock with some protection and yield at the same time.  (Having said that, we might get involved in a shorter-term bullish INTC trade in the next week or two).

Here is the structure known as a “put spread collar”:  

-Buy INTC stock for 21.03 (or just trade the options if you are already long stock)

-Buy Jan14 18/15 put spread for 0.65

-Sell Jan14 25 call at 0.52

So you paid 21.03 for the stock, and 0.13 in total for the put spread collar.  You have protection on your long stock between 18 and 15, and are unprotected below 15.  Your long stock gains are capped at 25.

The attractiveness of this trade in INTC is for 2 main reasons.

  1. INTC’s 4.1% div yield.  You will collect almost $1 in dividends over the next year as you hold this trade.  So your real risk on the INTC is between 20 and 18 (or $2), and then below 15.  Meanwhile, your reward in the best case scenario is about $5, if the stock closes Jan14 expiry above $25 ($4 of stock gain plus the $1 of stock gain).
  2. INTC’s tight historical range / cheap valuation.  Your main risk in this trade is that INTC trades below 15 by Jan 2014 expiry.  INTC currently trades at 10x earnings, so the stock at 15 has significant valuation support.  Technically, the stock has traded between 12 and 30 for the past 8 years, and the only period it traded below 15 was during late 2008 / early 2009.  Here is the 8 year chart:

Screen Shot 2013-01-18 at 1.14.39 PM

 

 

As you can see, this type of trade, where you’re risking $2 to make $5 over the next year is a decent long-term bet, particularly if you’re comfortable that the stock doesn’t trade below $15.  This is not the type of trade we typically do for the site, but it’s a valuable strategy for certain long-term stock positions.


MorningWord 1/18/13: $INTC’s 2013 Outlook Is As Clear As Mud

9:24 AM EST – JANUARY 18, 2013 BY 

MorningWord 1/18/13:  INTC’s Q4 report and Q1 /full year 2013 guidance issued last night was nothing short of a mixed bag for investors.  For the quarter, eps was higher than expected largely as a result of a lower tax rate.  Revenues were slightly worse than expected, which should not come as a huge surprise given the macro backdrop and recent PC data,  while gross margins did not come in at the worst case scenario (showing a mild uptick to expectations, but likely a result of cost controls rather than better product pricing).  The guidance for Q1 and 2013 does not suggest a meaningful uptick in the very near future.

INTC’s challenges re-positioning their business from a PC-centric to a mobile-centric computing world is not likely to turn on a dime and the company knows this as evidenced by their guidance for capital expenditures in 2013, ($13 billion plus or minus $500 million), which at the mid point would be a nearly 30% increase vs analysts’ estimates.  This suggests that the company is doing what they have done on almost every prior downturn, OUTSPEND THEIR COMPETITION.

The company’s outlook also implies a second half pick up in PC demand, which from my experience is the last thing investors really want to hear – that the year will be “back end loaded”.  Essentially, “biz sucks now but don’t be worried, we are kind of confident it will be much better in a couple quarters”.  Throughout my career, I have heard that comment about 100 times too many, and it is not the sort of statement that should instill investor confidence for the here and now.

INTC is down ~5.5% in the pre-market, giving back the last 2 weeks’ gains, which in my mind probably places it at about fair value when you weigh: SPX at 5 year highs, current low expectations, cheap valuation, large buyback in place, a dividend yield greater than 4% and the potential for investor enthusiasm centered around the hiring of a new CEO in the coming months.  The stock could clearly be a classic “value trap”, and for the time being it is a show-me story, as turning a $100 billion company’s focus is not a particularly easy thing to do in technology.

For those looking to play for a turnaround in the back half of the year, buying the stock to benefit from potential catalysts and yield, and selling an upside Jan14 call and using the proceeds to buy a near the money Jan14 put spread could be the way to play.  Receive the dividend, have some upside potential btwn now and Jan14 expiration, and have some downside protection.  I will detail this strategy known by some as  Put Spread Collar later today in A Name That Trade Post.