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The stock market, it seems, has been going straight up. And now the market is expensive.
Make no mistake about the real reason for the market’s rise. This chart shows that stocks are moving up in lockstep with the Federal Reserve printing money. And the momo (momentum) crowd is following along obediently.
In this situation, what is a conservative investor to do? Is there anything left to buy?
No worries, there are many strategies that conservative investors can use. Intel INTC, +8.87% shows the way. Let’s explore with the help of two charts.
Read: Intel enjoys a big rebound in the cloud, but the future is still hazy
Two charts
Please click here for an annotated chart of Intel that was published in 2017.
Please click here for a current annotated chart of Intel’s stock performance and AMD’s AMD, -0.42%.
Note the following:
• In 2017, I was getting emails from investors similar to the ones I am getting now. The stock market had been going up for eight years. Conservative investors were trying to figure out what could they buy that was safer.
• The Arora Report took a position in Intel with an average price of $34.01. Subsequently we repeated the same call several times.
• The first chart shows the breakout in Intel from a triple top that provided investors with one of many subsequent opportunities to buy Intel stock after our initial buy call.
• At that time, Intel stock was inexpensive, had a nice dividend, a rock-solid balance sheet and a dominant position in the market. Many gurus had sell ratings on Intel.
• The second chart compares Intel to AMD.
• For the period shown in the second chart, Intel shows a price return of 134%. In addition, there have been significant dividends. This includes the big bear market of 2008-2009.
• For the same period, the second chart shows AMD’s stock returning 256%.
• On the surface, it would seem that AMD has been a significantly better investment. However, that is not necessarily true for conservative investors.
• The second chart shows that AMD’s stock has been highly volatile. Intel has been relatively less volatile, not only compared to AMD but also to the semiconductor sector, as represented by the semiconductor ETF SMH, +0.76%.
• Most conservative investors simply cannot stomach the volatility that AMD has shown.
• In this case, AMD stock has worked out, but that is not always the case. It is not uncommon for highly volatile stocks that at one time or another fall significantly, like AMD did, to never recover. Stocks that do not recover are far more common than stocks that do recover.
• Intel reported earnings and projections better than the consensus and the whisper numbers.
• Intel has a trailing price-to-earnings (P/E) ratio of 14.82, a forward P/E of 13.53 and a PEG ratio (five-year expected) of 1.92.
• Intel provides a dividend of 1.99% even after this increase. The yield based on the original buy price of The Arora Report is now almost 4%.
• AMD has a trailing P/E of 270, a forward P/E of 46 and a PEG ratio (five-year expected) of 1.86.
• AMD doesn’t pay a dividend.
Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.
5G revolution
The 5G wireless revolution is ahead. 5G goes far beyond cell phones. It is going to significantly increase demand for semiconductors and memory. This will benefit Micron Technology MU, -0.29% and Western Digital WDC, -0.82%. Please see “How and when prudent investors ought to buy these 5G stocks.”
China
During the trade war, the U.S. used its dominance in semiconductors as leverage over China. China is in the mood of catching up with the U.S. This will benefit semiconductor equipment and testing stocks such as Applied Materials AMAT, -0.95%, Lam Research LRCX, -0.44%, KLA KLAC, -0.01%, ASML Holding ASML, +1.36% and Teradyne TER, -4.72%. Please see “This U.S. company will benefit as China tries to catch up in semiconductors.”
Big Apple contracts
Broadcom AVGO, +2.35% has struck deals with Apple AAPL, +1.09% to supply $15 billion of products. There are not enough details at this time to comment further. This may negatively affect stocks of Skyworks SWKS, -3.89% and Qorvo QRVO, -3.59%. Qorvo is long from $15 in The Arora Report portfolio and is trading at $117 as of this writing. This illustrates the twists and turns in the highly volatile semiconductor sector.
Intel bears
There are plenty of Intel bears. Bears are not likely to give up. The bear case is that AMD is ahead of Intel and is taking advantage of Intel’s supply shortages.
Nonetheless, Intel is under-owned. An upgrade cycle by financial analysts is ahead, as many of their targets are below where Intel’s stock is trading. Most investors should wait for a dip into the Arora buy zone to buy Intel. For aggressive investors, we have started a trade-around position. A trade-around position is a shorter-term position around a long-term core position. All investors should learn the technique of trade-around positions, as they often increase returns and reduce risks.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.
