The Big Picture for the Week of August 29, 2010

A couple of observations about a couple of individual stocks.

The first stock to mention is Intel (INTC). It made news yesterday for a revenue warning and it made news a few days ago for its intention to buy McAfee (MFE). The idea behind the take over, as I understand it, is to embed security directly into the chip. The stock has long been a titan in the tech world at least in stature even if not performance for the last ten years. Prior to the last decade it generally was a very good performer as the world began to adopt, and upgrade, personal computers with Intel chips.

The stock price topped out ten years ago, almost to the day actually, at about $72 and closed yesterday at $18.37. Intel is not the only tech mega cap to be down that much over the last decade. Obviously the highs from ten years ago were a product of the bubble and on a slightly more fundamental level computers and the internet have already changed our lives. The growth in the future may be good or bad, this applies to many of these stocks, but the impact on our lives from here is now more likely to be evolutionary not revolutionary like it was 10, 12, 14 years ago.

Looking forward Intel is clearly in a position to still make computing better in developed countries and more available to developing countries and wherever innovation goes the company can be a part of it and grow nicely and profitably but probably not explosively save for the occasional six or 12 month period. Back in 2000 Intel's PE ratio peaked out near 70, worked lower fairly quickly to around 20 where it stayed for a while, it then shot way up over 100 into late 2002 and early 2003 before going back down again fairly quickly. For most of 2003 it meandered around 45, and then dropped precipitously in 2004 to about 15. From there the PE seemed to be rangebound between 15 and 25 until the low in March 2009. From there it shot up and then rolled over to where it is now at 11 times TTM. The historical info came from BigCharts, you can add PE ratio as one of the lower indicators.

I don't believe PE ratios offer much predictive value as stocks can stay cheap or expensive for a long time but 11x is cheap based on Intel's past. The near term growth estimates are very modest, the company has $18 billion in cash (before buying MFE), $2.5 billion in debt, most of the other stats are decent and the company yields 3.4% which strikes me as very high. The payout ratio for that dividend is around 30%.

Tying in to the post earlier in the week about dividends I have no doubt that should the market go down a lot from here Intel would also go down a lot but maybe a little less for being relatively cheap. The interesting thing is the extent to which the stock, as opposed to the company, has changed over the years from a high flier to a slow grower with a fat, albeit easily covered, dividend. I don't own the name directly and can't envision buying it but that 3.4% is available in this sector is fascinating.

The other stock to mention is 3Par (PAR) and the bidding war that has broken out between Hewlett Packard (HPQ) and Dell (DELL). 3Par is in the cloud computing space which seems like a reasonable next step, or maybe a couple of steps down the road, for the tech industry to take. It would be reasonable to conclude that HPQ and DELL think it is important anyway.

Based on the chart there are pages and pages of headlines to scroll through) after trading at $10 for a long time the first offer came taking the stock up to $18. Then the stock jumped up to $26 and closed yesterday at $32.46. The point here is not the exact prices of the offers or where the stock ultimately gets taken out but how this one has been an exception to a pretty reliable rule of thumb that I have written about, relied on in the past and will rely on in the future should a stock we own for clients get a bid.

I have found that in most instances it doesn't get any better than when news of the offer first hits and the stock has the initial pop. The best example of this from my own experience is from a little over three years ago when news hit that Microsoft was taking a run at Yahoo. Yahoo was a client holding, I woke up that morning, saw the news and sold the name in the pre-market session. This also worked on a personal level, when I was in a different part of the business and pre-blog, selling AOL immediately after the news of the Time Warner merger.

Obviously no single strategy or type of trade can be the best way to go 100% of the time so it is interesting to see the 3Par saga play out in ever higher prices. Had we owned it I would have sold the day of the first offer (maybe the second day for logistics but no later than that).

The picture is from Zion National Park.