Intel: Nelson's Intuition Comes to Fruition
It was nearing the end of 2015, and I don’t think I was more bullish on a stock than Intel ( INTC ). In October 2015, I published that “Intel may have a breakout year in 2016.” I liked what Intel had done to keep AMD’s ( AMD ) back against the wall, and the chip giant was making nice strides in the mobile market against Qualcomm ( QCOM ), particularly with key phone-maker, Apple ( AAPL ). I liked the acquisition of Altera in part because the company is a free-cash-flow generating machine with little capital intensity. Field-programmable gate arrays (FPGAs) will continue to reshape the semiconductor landscape, and the Altera purchase will give Intel a leg up.
Well, it didn’t take long for me to start worrying that I made a mistake with this one. A lackluster fourth-quarter 2015 report sent shares of Intel below the broader S&P 500 ( SPY ) market return, as shown in the image above. I was encouraged by unconfirmed reports in March that Intel won a portion of Apple’s iPhone 7 baseband modem orders, but the company was still trailing the index by several points even then. In April, I brought to light the very interesting dichotomy of how many consumer staples entities like Coca-Cola ( KO ) are trading at lofty unadjusted earnings, despite reported revenue falling, while Intel, which many peg as a tech dinosaur, was actually experiencing revenue growth, “ Did You Know: Coca-Cola is Shrinking: Intel Is Growing? (April 2016).”
The second-quarter 2016 report showed that Intel’s top line was still growing at a decent pace, and that’s when I think the stock market finally started to “get it.” In fact, the month of July 2016 was a great one for Intel, as during the month, it closed much of its underperformance relative to the broader stock market, as shown in the image above -- and then to really hit the “growth” point home, in July, I wrote in the piece, “ Intel’s Top Line Still Growing (July 2016)”:
The Intel “story” continues to be misunderstood, in our view. The company is growing, and its traction in mobile has been noteworthy, making ongoing gains against rival Qualcomm. Intel is also navigating the difficult PC market well, and strength in data center, the Internet of Things and programmable solutions will pave the way for ongoing company-wide expansion. Unlike the IBM’s ( IBM ) of the world where revenue is in free-fall, Intel is not struggling, and its purchase of asset-light, free-cash-flow rich Altera was a very savvy move, even though it has strained the balance sheet a bit. By our measures, long- and short-term debt stood at ~$25 billion at the end of the second quarter, slightly higher than the sum of total cash investments and marketable equity securities (~$23 billion). Management said on the conference call that it expects to improve its net cash balance over the second half of the year, however.
In that same article, I talked about how Intel was trading at less than 15 times current-year non-GAAP earnings, emphasizing that it was a rare bargain in today’s market, particularly relative to other dividend payers, sometimes fetching multiples north of 20 times on declining earnings, “ A Kleenex? Consumer Staples Trading At Nosebleed Levels (August 2016).” Then, the stock really closed the ground, and today, its return is now greater than that of the broader index this year. Now, is this a big deal? No. Is beating the market with one idea something to write home about. No – and especially not in the context of the market-beating returns of the Best Ideas Newsletter portfolio since inception. Has the return on Intel been blockbuster? Nope.
So why am I writing this article?
In many ways, it’s to show how patience pays off. For example, if you’d bought Intel late last year when I had been talking about a big 2016, you would have been extremely disappointed if you were expecting outperformance through the first half of 2016 and sold during that time. You may have even wanted to cancel your membership during that time, thinking that I had lost the “magic” touch. It’s clear that I can't predict the path of Intel's stock with precision, but I knew its fundamentals had been shaping up, I liked its dividend yield--which continues to capture interest in today’s market--and I knew inroads with Apple would serve the market a nice headline catalyst to draw buying interest. All of this took time to come together--many months, but it turned a disappointment and perceived mistake into an outperformer.
Look--the market is going to play games with your head. It’s going to make you think that you can’t beat it (and others are going to tell you the same, so you park assets in index funds and THEY generate fees on them for their advice). Depending on your time horizon, the market is going to make you even think that winners are mistakes, especially if you’re not patient and you don’t build conviction in your thesis BEFORE you buy. For example, Intel in early 2016--not good; Intel in late 2016--good. Intel has been a big winner since it was added to the newsletter portfolios many years ago, but its path in 2016 had been weighing on my mind, as you can probably tell. I just wanted to share the good, if not less-bad news. The takeaway: What often look like mistakes are just good calls in progress. It happens time and time again. Don't be the fool!
