I’ve just updated my Current Market Tactics page. Look at currencies; consider EU multinationals with large US exposure; hard to find wa in Japan.
Category Archives: Recent Market Action
Intel’s good 2Q14–and Wall Street’s strong reaction to it
Last month, Intel (INTC) announced to the market that its 2Q14 was shaping up better than the guidance it had given when it announced 1Q14 earnings. Analysts covering INTC (a pretty pedestrian lot, in my view) dutifully raised their estimates to incorporate this news. The new consensus was centered around $.52 a share in eps for the quarter. The stock began a 15% move higher.
A week or so ago, research firms that follow the PC industry began to suggest that the personal computer market is beginning to bottom out after a long slide. At the same time, these firms observed that the tablet market is starting to fall off. Some put the two observations together into a story that the tablet market was waning because customers were either finding them inherently unsatisfactory or poor value in comparison with chrome- or ultrabooks. AAPL appeared to confirm this analysis with its announcement of a partnership with IBM to sell iPads equipped with IBM software to corporations.
INTC reported earnings of $.55 a share after the close on Tuesday (a full analysis in tomorrow’s post). The company also raised its revenue guidance for full-year 2014 from flat to up 5% (corporate strength, the hope that consumer demand will rebound, plus the one-time positive of wholesalers beefing up their inventories a bit). My take: good news–not earthshattering, but good–and pretty much in line with data that had been coming into the market over the past while.
But no.
Yesterday INTC was up by 9%+ on quadruple normal volume, in a flat market. MSFT, the other member of the once-dominant “Wintel alliance,” gained almost 4% on more than double normal volume.
As a holder of INTC and MSFT, I’m happy to have the gain. But I find the market action a bit excessive.
I have two reactions:
–it may be that part of the rise has nothing much to do with Wintel but is the market rotating toward large-cap tech laggards. If so, it would be a sign that the upward market momentum of the past nine months or so is in its final stages.
–for INTC, the “free lunch” stage is over. On earnings of, say, $2.10 in 2014 and $2.25 in 2015 (figures that are higher than Wall Street’s current median, though admittedly some analysts may not have published post-earnings call adjustments), INTC is no longer stunningly cheap. To continue to hold the stock, we have to believe that the PC business is at least stable and that INTC’s foray into tablet/smartphone chips will at least get to breakeven within a couple of years.
While I may trim my position further (as I’m writing this, I haven’t yet), I like what INTC is doing and am content to remain a holder.
More tomorrow.
Current Market Tactics, June 12, 2014
I’ve just updated Current Market Tactics. Second half = more of the same.
thinking about Intel (INTC)
I became interested in INTC in late 2011, when it was trading at under $20 a share and yielding well over 3%. It was a good news/bad news story, where it seemed to me that only the bad news was reflected in the stock. So, although I’m a growth investor (one might argue that because I’m a growth investor), I was attracted to the stock on value grounds.
The bad news then–and the continuing bad news today–was/is that INTC had missed the boat on processors for mobile devices.
The good news had two aspects:
–INTC had realized what a horrible blunder refusing Steve Jobs’ invitation to develop chips for the iPhone and was working to correct it. In addition,
–INTC had a lead of a least a year, maybe two, over anyone else in cutting edge process technology (smaller, cooler, less power-hungry). That advantage,INTC said, would quickly put it back into the mobile game–maybe as soon as 2012, certainly by 2013.
I reasoned that at 5x cash flow, 8x earnings, proprietary technology and a 3% yield, there was little downside. So I bought some and began to write about the story.
The stock went to just above $28 a share within six months or so. As the stock approached $25, however, I had to change my investment thesis to something more than “more bad stuff is unlikely, good things might happen, and I was being paid about a 30-year Treasury yield to wait.”
I thought $35 was a possibility if–as Paul Otellini the then-chairman said it would–INTC developed mobile customers quickly. At the same time, I recognized that if the company did not show mobile progress there was risk that the stock would reverse at least some of its gains.
Whoops!
A year later, the stock was at $19.10, below its year-earlier low. Mr. Otellini, who by this time had announced that 2013 would join 2012 in the “nothing good to report” column, was out as CEO and the search was on for someone with a greater sense of urgency about INTC’s predicament.
déjå vu all over again
Brian Krzanich, a process engineer and a 30+-year INTC employee, is now the CEO. The profit profile for this year and next–flat–hasn’t changed. I can’t imagine the dividend being increased, although I can’t conceive of it being cut either over any reasonable investment horizon. The next sea change in process technology is looking to be so expensive (triple the cost of the previous jump) that even INTC won’t go it alone–implying that INTC’s current edge in processing skill won’t last forever.
Nevertheless, INTC shares are trading above $28 again and flirting with the 2012 high.
Why?
Part of this is because the overall market is up sharply since 2012. But INTC has been outperforming since shortly after Mr. Krzanich took the helm. I think there’s good reason for this. Mr.Krzanich is proving very nimble at using INTC’s technology to forge partnerships to get INTC the mobile knowhow and distribution it needs.
I think INTC is now in hands better suited to deal with INTC’s weakness in mobile. than it was in 2011, when I first bought the stock There’s a considerable chance, I think, that INTC will make a successful transition to smartphone and tablet supplier, with profit increases to show for it in 2016. $35 a share still sounds like a good price target to me.
Nevertheless, as was the case in early 2012, INTC is no longer the “no-brainer” it was in late 2012. I’ve just sold about 20% of what I bought under $20 and I’ll likely trim a bit more.
once more on Amazon (AMZN)
I’ve been doing a lot of thinking/daydreaming/musing about AMZN lately. I don’t know quite why, since I’m probably not going to buy the stock. But my mind apparently doesn’t want to let go.
The latest thing to pop into my head is something I’d seen on the Value Line page for the stock but hadn’t paid much attention to. It’s that:
–during the bounceback from the 2000 collapse of the Internet Bubble, AMZN shares tended to trade at about 30x cash flow. In the recovery from the Great Recession, its cash flow multiple expanded to 50x. Both are mind-boggling figures, to be sure-the second more so.
What could cause this gigantic multiple expansion, particularly during a period when investors were scared out of their wits and therefore more cautious than usual?
…possibly a better appreciation of the transformative nature of the internet and AMZN’s premier position as online merchant. Cash generation from operations continues to grow at about 25% a year, virtually the same as before the GR, despite the company’s larger size. That’s both a plus and a minus. It’s an heroic achievement to maintain growth in the face of ballooning size. But that’s usually something that keeps the multiple from contracting, not that causes it to expand by 60%.
…so I can’t help thinking that a lot of the favorable move is due to the Fed’s super-accommodative money policy.
Which gets me to my point.
Let’s assume that the economy’s release from intensive care and a return to normal money policy cause AMZN’s cash flow multiple to shrink to a “mere” 30x. In simple terms, this means the stock should lose 40% of its value–maybe not all at once, but ultimately. Continuing relentless growth in cash flow could cushion the fall somewhat.
Since the end of January, when the Fed made it clear it would continue baby steps toward normal despite weakening economic indicators, AMZN shares have pretty much made the entire reverse movement already–they’ve lost 25% of their value in a flat market. They haven’t been alone, either. Every other story stock has fallen this much–or more.
This thought makes me want to speed up my efforts to dig through the rubble.