It isn’t unusual for me to get hundreds of e-mails a day … and that’s not including all those pesky Viagra and mortgage refinance solicitations.
While I can’t imagine life without e-mail, there are occasions when the sheer volume overwhelms me. One of those days: May 24, the day after I said Intel’s stock was headed to $9.
Long-time readers know that wasn’t the first time I’ve said to dump Intel’s shares. I started shouting “Sell, sell, sell†back in 2000, and I’ve been regularly singing the refrain ever since.
If you took my advice when Intel was at $70, $50 or even $30 a share, you’ve saved yourself a pretty penny.
But even if you’re still holding on, consider getting out now. I’m more convinced than ever that Intel is headed for single-digit land. That would be a 50% haircut from today’s already-low level.
The PC Industry
Is Still A Mess
The writing is all over the wall. Three important companies in the PC industry have been spewing bad news …
First, Phoenix Technology, the largest BIOS (Basic Integrated Operating System) software maker in the world has coughed up a huge hairball, warning that it would miss its quarterly expectations by a country mile.
That sure got my attention because BIOS software is used to start up every computer in the world.
When Phoenix, which has a 70% share of the BIOS software market, is having problems, it’s a giant red flag that something is very, very wrong in the PC world.
Phoenix Technologies warned that its second-quarter sales would only hit $10 to $12 million, a far, far cry below its prior guidance of $24.5 million to $26.5 million.
According to the company,
“We have seen slower-than-expected Core System Software or BIOS sales … as well as a change in the supply chain buying patterns of ODMs [original design manufacturers] due to a general inventory build-up in the PC market.â€
In other words, Phoenix’s business really stinks.
Bottom line: If PC makers are buying fewer BIOS systems, it means they’re making few computers. And that spells trouble for Intel.
Second, Hewlett-Packard, the second-largest computer maker in the world, announced on Thursday that it was going to close “several hundred properties.â€
Wow, that’s a lot of closures! And believe me, they’re definitely not doing this because business is booming.
Third, Dell’s business is still a wreck. The company is now going to simplify its pricing structure by reducing its promotions and rebates by 80%. The goal: Raising prices to boost its slumping profit margins.
It’s a bad move, but Dell is desperate. The company warned that its second-quarter profits would fall far below expectations. Dell now says it will make about $0.22 a share rather than its previous forecast of $0.32. Don’t forget, the company already lowered its forecast once back in May. It was initially promising profits around $0.37 a share.
According to Dell, the problem is “aggressive pricing in a slowing commercial market worldwide.†That’s nothing more than weak demand.
Clearly, the PC industry is becoming a low-growth industry with Munchkin-like profits.
No wonder …
Intel Is Coming Apart
At the Seams
On July 13, Intel announced that it was cutting its management workforce by 1,000 jobs.
More troubling: It’s widely expected to lay off another 9,000 or 10,000 workers in the very near future.
Intel isn’t chopping its workforce because business is spectacular. In fact, the company just reported a horrible second quarter. The highlights:
Slumping profits: Intel reported second-quarter profits of $0.15 a share. That was $0.02 above expectations, so the Wall Street crowd was impressed.
Not me. Profits of $0.15 a share aren’t very impressive once you realize that Intel posted $0.33 a share in the same period a year ago. That’s a 57% plunge … hardly something to get excited about.
Sagging sales: Revenues also dropped by 13% to $8 billion. That was at the low end of the forecast Intel delivered in April, and a whopping $1 billion below Wall Street’s expectation of $9.04 billion. Did I mention that it also represents a 10% drop from the previous quarter?
Worse yet, the future doesn’t look any rosier. CFO Andy Bryant warned that full-year sales are going to fall short of the company’s $37.6 billion forecast, which already represented a 3% decrease from 2005.
Narrowing margins: Intel warned that its 2006 gross profit margin would fall to 51%, down from the 53% it promised earlier this year.
Bryant attributed the margin contraction to “price pressure.â€
For perspective, Intel was bragging about 62% profit margins last year.
Swelling inventory: Intel has one thing that isn’t dropping — the amount of unsold inventory sitting on its shelves. In just 90 days, the company’s inventory ballooned from $3.6 billion to $4.3 billion — a 21% surge!
Not only is Intel swimming in inventory, it doesn’t expect to dig itself out from under the pile in the third quarter, either.
You’d think the company would do something about this. But Bryant says he’s “not uncomfortable with the level of inventory.†Talk about burying your head in the sand! Don’t make the same mistake …
There’s Still Plenty of
Money to Be Lost …
Or Made!
Even after all that bad news, it isn’t too late to sell. I’m sure the Intel fans don’t want to hear it, but the stock is on a slippery slope.
Naturally, if you own Intel, you should seriously consider selling it. The problem: You might not even realize you own it.
If you invest in mutual funds, the portfolio manager may very well be loading up on Intel despite the company’s problems. So I put together a table to help you figure out who the “Intel Fools†are. If you’re invested in one of these funds, think long and hard about whether you want to stay in it.
Of course, there are also ways to make money from Intel’s demise.
One way: Sell Intel “short.†When you sell a stock short, you’re borrowing shares from another investor in the hope that the stock price will fall. Reason: If it does decline, you’ll be able to replace the shares and pocket the difference.
For example, if you sold 100 shares of Intel short at $18 and then re-bought, or “covered,†at $9, you could walk away with a $900 profit less commissions and dividends.
There’s a big catch though — if I’m wrong, and Intel ends up rising to, say, $50 a share, you’d lose $3,200 plus commissions. In other words, short selling carries potentially unlimited risk. That’s because a stock price can rise as high as the market will take it.
This is why I generally suggest a different approach: Put options.
Put options help investors protect themselves and profit from declining stock prices.
It works like this: You buy a put option contract for a set amount of money. This contract gives you the right, but not the obligation, to sell a fixed number of shares at a fixed price (the “strike†price) within a predetermined amount of time. The more the stock price falls, the more the put option is likely to be worth.
For example, you could buy a January Intel put option with a strike price of $17.50 for roughly $140 dollars. If Intel drops to $9 before January 19, 2007, these options would rise to approximately $850 — about a 600% gain!
On the other hand, if Intel doesn’t drop, your entire $140 investment will be worthless. That is, however, the beauty of the purchase options: Your risk is strictly limited to their cost plus any commissions you pay your broker. No matter how high Intel might rise, you’ll never lose more than your small initial investment.
I’m not saying you should rush out and start buying put options on Intel or anything else. As always, timing is everything. However, there are big profits to be made if you can identify stocks with flawed business models and falling profits. And Intel is looking pretty darn sad these days.
Best wishes,
Tony
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MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Colleen Collins, Amber Dakar, Ekaterina Evseeva, Monica Lewman-Garcia, Wendy Montes de Oca, Jennifer Moran, Red Morgan, and Julie Trudeau.
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