Shares of Intel (INTC) are down 15% on the year and down about 17.5% from its 52 week high made in the last week of 2015. The stock declined 9% on January 15th following their Q4 results that was coupled with weak forward guidance, the largest one day post earnings decline since January 2008. The stock’s weakness following the call was largely the result of comments management made relative to business in China, quotes from Q4 call (emphasis mine):
Brian Krzanich CEO
Wrapping up, our results over the last year leave me increasingly confident in our strategy. While our outlook for the first quarter reflects some caution about overall demand, particularly in China,we continue to expect solid growth in the business in 2016.
Stacy Smith CFO
For the first quarter of 2016, the mid-point of the revenue range is expected to be $14.1 billion. This forecast, which includes an extra work week and the newly acquired FPGA business, is on the low-end of the average seasonal range. This outlook represents a soft start to the year as we remain cautious on the level of economic growth, particularly in China.
Brian Krzanich CEO
It is the same type of trend we saw in 2015, emerging markets slower than the mature markets, U.S., Western Europe looking okay. China and the rest of Asia, slow. It was both, consumer and enterprise.
Stacy Smith CFO
Then our team on the ground in China has gotten fairly cautious about what is going on in China right now. As you know, that is the largest PC market, so we are just little cautious on the growth rates there.
Shares of INTC are up only 6% from its 2016 lows, and up 18% from its 52 week lows made on August 24th. Aside from the late August swoon, shares of INTC had three little dips below $28 (circled) where the stock found support:
The recent drop, and under-performance to its peers (INTC is down nearly twice as much as the Philadelphia Semiconductor Index (SOX) ytd) and vs the S&P 500 (SPX) is steep considering the stock already trades at a significant discount to the SPX at 12x expected 2016 earnings that should grow 4% yoy on 7% sales growth.
My view is that shares of INTC would be trading much better if investors thought their cautious tone about China was a one quarter thing. But they don’t. It’s hard to press a stock like INTC on the short side given its 3.5% dividend yield, massive share repurchase program and potential of higher than expected cost savings from their recently closed $17 billion acquisition of Altera. But bad price action is bad price action, and if this recent broad market equity bounce reverses, and the fears of a global recession re-emerge in the coming weeks/months, targeting weakness will be a profitable trading strategy.
Short dated options prices have come in fairly hard in INTC, but remain fairly elevated, but with 30 day at the money implied volatility at 25.5% is below the one year average of about 27%, options prices look fair:
So what’s the trade?
It would not take much for shares of INTC to catch a bid if the market continued higher, or there was some piece of positive fundamental news to catalyze the shares like the potential for design wins in mobile devices to offset PC weakness as detailed by BarronsOnline this morning (here). So any short biased trade needs to define risk and keep that risk as inexpensive as possible.
The stock sets up for a good candidate for put calendars targeting their Q1 results scheduled for April 19th.
*Trade – Buy the INTC ($29.40) March/May 28 put calendar for .73
- Sell to open 1 March 28 put at .32
- Buy 1 to open May 28 put for 1.05
Rationale – This trade targets a pullback to 28 in the next few weeks and offer optionality if that were to happen to close the short March put and roll it out to April or May to further finance owning the April 28 puts that catch earnings.