Thursday, April 21, 2011

Regarding Intel's Quarterly Results & Investment Strategy

Intel's earnings report after the market's close on Tuesday evidently surprised analysts. As I write this before Wednesday's market open, the firm's equity price has risen some 7% in after-hours trading.

Intel CEO Paul Otellini hurried onto CNBC's morning program to stump for his firm and its future prospects. No real surprise there.

Way back in 1997, when I bought my first live portfolio based upon my equity strategy, Intel was one of the selections. That was the only time it was a holding.

The first chart compares Intel's equity price to the S&P500 Index's for the past five years. For all the risk you'd assume in holding the single issue, Intel, you would have had a return virtually identical to that of the broadly-diversified index.

But what about Intel's fundamental performance? After all, Otellini was crowing about their revenue growth.

So I reviewed the firm's relative revenue growth for the past five years from the analysis my quantitative selection process performs each month. As I expected, on a multi-year basis, Intel's revenue growth rates have been either inconsistent, or below-average during the past several years. It's never been above-average on anything approaching a long term basis.

This means that, to capture gains in Intel's share price, which are inconsistent, you have to be a market-timer. That's a very risky strategy, as most professional investors will tell you.

If, instead, you prefer to hold Intel for the long term, well, look at the second chart comparing it's price with the S&P500 since the mid-1980s. Even as a meteoric growth issue back in the early years of the timeframe, it was not a smoothly-rising curve. Then the late-1990s technology sector bubble broke the back of the stock's growth character.

Despite what some pundit on CNBC blustered about Intel having revenue growth that now makes it, well, a growth's not. A quarter here, a quarter there...does not a growth issue make.

Has Intel suddenly recaptured the magic of its old, 30 years ago self? Doubtful. Last time I checked, they hadn't entered a radically new business. Yes, they bought McAfee. But it's not like they've suddenly entered online social networking or online couponing. Neither of which would probably help them at this point.

No, I think all we're seeing is an unexpectedly strong quarter of revenue growth for Intel. If anything, its being unexpected is probably a greater testament to shoddy sell-side analysis than anything else.

But unless you believe Intel has magically entered a new era with its same old business mix, you'd probably be better-advised to observe the equity's performance from the sidelines, rather than risk your own capital on the rollercoaster that is Intel's equity over time.

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