Intel: Buy, Sell or Hold?
I won’t hold you in suspense. Here’s my recommendation:
Firs, the easy part. If you own Intel (INTC) then HOLD. I would not buy and I would not sell. You’re in a good place right now. I’m going to explain all of that very soon.
Next, if you’re thinking about buying, you can see that Intel’s been moving up, and it spiked up today, which I also talk about later.
So, if you’re “into” the momentum and the growth story, then you’re probably looking at something like a 12% rate of return through 2020, assuming Intel’s P/E moves to up around 15. Although, after the spike today, I’d have to revise that down to probably 10-11% per year.
If you believe that Intel is more likely to float around the 10 year average P/E that’s between 12 and 13, then your annual rate of return drops to around 6%. And really, considering the spike today, it’s more like 5%.
Let’s combine things together to come up with a worst case to best case range. You’re probably looking at something like 5% to 12% annual gains. And if I had to dial this in, it’s probably 9-10% per year through 2020. If that’s acceptable, then this becomes a BUY for you.
Is this simple? You bet! However, to help guide your thinking and to go much deeper, I put together my story for you. There’s way more to the Intel investment thesis that you need to know.
Let’s get started!
Circle of Competence
I’m not a fan of most technology stocks. However, I remember when I broke my rules back in September 2012. That’s when I first bought Intel (INTC). It hasn’t been smooth sailing, that’s for sure. I’ll come back to this point.
I’ve got a bunch of education, including some time formally learning about information systems, internet technology, programming, databases and that sort of thing. Most of that formal training was rooted in management principles and business operations.
I’ve also got real world experience, like being a webmaster, business analyst, software engineer, software manager, and human-computer interaction consultant. I won’t bother you with more details on this. You’ve just suffered enough puffery.
The key point is that despite the education and experience I still have a strong aversion to investing in technology. It moves too fast. Empires rise and fall. I’m keen on stability and predictability. I think that most investments in technology are doomed because the uncertainty is too high.
While we all think we can tolerate change and disruption, the human mind hates this chaos and willpower isn’t enough to prevent buying high and selling low. The rational mind has a difficult time preventing the subconscious mind and brain chemicals from screwing over your wealth. Greed, envy, fear are alive and well. Don’t blame me, that’s the human condition. It’s baseline.
To emphasize, despite my education and experience I still don’t like to invest in technology. However, I don’t completely hate world class industrial companies and manufacturers.
Intel Beer Goggles
I was having a conversation with a guy over a beer. He wouldn’t stop talking about so many different technologies. He was a geek, no doubt, but also an investor and business owner. He was flying from one company to the next. I started to tune out. Then he brought up Intel, and I paid attention.
He was talking about the size of Intel. He explained more details about the famous tick-tock schedule. He brought up Andy Grove. Many tumblers started to line up and unlock Intel in my brain.
Here’s a feel for that vibe:
There is much more. What you should notice is that technology was NOT my #1 consideration. In fact, I repeatedly tried to kill this investment idea. But, the size, scope and strength of INTC greatly impressed me.
Intel As A Dirty Smokestack Company
What really worked to shape my mind was this: I ignored INTC as a technology company and instead viewed it as an industrial and manufacturing company. I felt this was justified given what I knew about the company. Throw in some savvy marketing and great leadership, and you’ve got a totally different type of company. Innovation with a steady hand was obvious to me.
I don’t love industrial or manufacturing companies. They are cyclical and there’s a lot of volatility. But, the best of them are easy for me to understand and I also tolerate lumpy earnings. Two examples are Deere & Company (DE) and Cummins (CMI). I looked at INTC much like I looked at DE and CMI, looking past price volatility and earnings swings.
One thing that was especially important with INTC was how it handled cash and debt. INTC’s got an S&P Credit Rating of A+ and does a fine job with capital. It impressed me, tremendously. If you’ve got cash and the tide goes out, you’re probably going to be fine.
So, that’s a lot of the “soft” thinking that I remember. It’s what I could pull out of my old notes and a couple of emails that I sent to myself. I’m going to shift into what numbers I was looking at, and when exactly I was buying.
The Dot Com Horror
I almost decided against INTC because of this:
And, although it was a complete overreaction, I looked at how an investment in INTC in August of 2000 through September of 2012 generated a loss of over 63%, or as you can see below, a lovely (8%) annualized loss. Spooky!
Remember, that’s what I was literally looking at and thinking about. So, the charts alone included an extreme price. Plus, look at the earnings from 2000 through 2009. That’s about a decade of painful stagnation!
And, in 2012, we were really just starting to feel a little better about the economy. And, not by much, I might add.
The Truth About Dividends And Buybacks
One bright spot was that dividends were generally going up:
Of course, you already know how this was accomplished.
Since INTC’s earnings weren’t growing, this “growth” was somewhat artificial. The payout ratio in 2000 was about 5%, then 15% in 2001, then 23% in 2005, then 48% in 2009 and then around 40% in 12.
The “first order” thinking here quite obvious. INTC decided to reward shareholders with dividends.
What about share buybacks? Here’s what I was looking at, roughly speaking. You can see a lot of money pouring in; cannibals.
Again, the “first order” thinking here is that INTC decided to reward shareholders. I mean, that is actually true here. While we can debate the effectiveness of the buybacks, the intention and the actions seem pretty clear to me.
But, I strongly believe that something else happened between 2000 and 2012:
I was seeing a transformation at INTC: From an internet hot stock company to a mature, “smokestack”, technology blue chip.
At the time, no one was really giving INTC credit for this maturity. It was damn slow and to an impatient eye. It was easy to miss. To be very blunt, this is when any why I started to get excited.
I felt like I found some alpha! My strong desire for stability, consistency, loyalty and tenacity my investments was showing up in INTC.
It was a very pleasant surprise…
And That’s When I Started Buying
I started buying on 15-Sept-2012. Then, here’s what came next:
- Added on 28-Sept-2012 (price unknown)
- Added on 09-Oct-2012 (price unknown)
- Added on 20-Nov-2012 ($19.66)
My average cost was $21.80 and I was satisfied.
Other than collecting my dividends, I didn’t do anything special with INTC. I just sat there. I kept watching and learning.
I Got An Itch
Here’s what I was looking at, from the buys I made in late 2012:
I started selling off some blocks of INTC, capturing 25-30%.
- Sold on 23-Dec-2013 ($25.22)
- Sold on 11-Feb-2014 ($24.48)
- Sold on 17-Mar-2014 ($24.68)
That said, I stopped selling. I decided to hold.
You can see that from that point forward by a year or two that INTC was creeping up and up. I felt pretty good about pulling some “quick gains” off the table, and I felt pretty good about seeing INTC move steadily upward.
Where We’re at Today
Roughly speaking I’m sitting on overall gains of around 125-130% in about 5 and 1/2 years. Annualized that somewhere around 16-18% per year.
Not from genius. I created a little bit of luck. Opportunity met preparation. And look, this isn’t a 10-bagger or anything spectacular. However, it does give me confidence that:
- buying low and holding is quite rational
- taking some profits is not the end of the world
- dividends are important and smooth things over
- research and due diligence are required
- price doesn’t always reflect value
- long-term thinking can provide some “alpha”
- any single chart in isolation is a liar
Today (26-Jan-2018), INTC is spiking in price in a big way:
- Q4 beats
- data center growth
- upside guidance
The value was there before this spike but now we see how facts intersect with the emotions of the general market.
Right now, Mr. Market is thrilled and offering up shares at higher and higher prices. When Mr. Market is so excited, I slump, grumble, and moan a little. Mostly, I walk away and ignore the cheers and celebration.
I read the news coming directly from INTC, and sip on my coffee, scrolling my way through the comments. So many cheerleaders!
Well that looks nice.
…the growth story is catching on.
Looks amazing to me. I knew altera purchase was just the beginning.
This thing is similar to MSFT 2 years ago. It can easily double in 3 years
Yeah baby. Love the bump in divvy and the outlook. Long INTC
Intel huge moat …
Love INTEL! Long time!!
Of course, you get the point.
It all smells so good, right?
Up, up, and away…
What I Am Doing With INTC Today!
No buying, no selling.
Oh, sorry, I’ve got to go. My wife is yelling at me. Time to walk the dog.
Disclosure: I am/we are long INTC,CMI,DE.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.