UPDATE: A breakout in this cheap, forgotten stock is powering the Dow Jones Industrial Average
By Nigam Arora
Money managers have deployed new cash in a dinosaur that had been left for dead
At the end of September, we shared with subscribers of The Arora Report our forecast that the stock market would rise at the beginning of October.
The forecast has proven to be correct, yet it wasn't rocket science. It was based on a simple observation that new money pours into Wall Street at the beginning of a quarter from pension funds.
And it turns out that money managers have deployed the new money in a dinosaur that had been left for dead. The dinosaur is chipmaker Intel (INTC). It turns out that the breakout in Intel's stock is powering the Dow Jones Industrial Average . Let's explore that investment starting with a chart.
Please click here (https://thearorareport.com/chart-intel-stock-breakout-10032017) for a larger annotated chart of Intel's stock. Please note the following from the chart:
-- This is a weekly chart and, thus, is of more value in analyzing a breakout.
-- The price of Intel is breaking out.
-- The breakout is from a so-called triple top.
-- Breakouts from a triple top tend to have a higher probability of being successful.
-- The RSI (relative strength index) is barely overbought and shows that there is significantly more room to run.
-- The breakout is on low volume. This is negative and poses risks for those buying at current levels.
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Why the breakout now?
The gurus are out in full force regurgitating the old news as a reason for the breakout. My 30-plus years of experience in the markets has shown that breakouts are seldom caused by stale news.
The real reason for the breakout is that many risk-averse investors are searching for cheap stocks that are also laggards. Intel fits the bill on both counts. At least in theory, there is less risk in buying Intel today than a high-flying competitor.
Here's how Intel has fared over the past month compared with its Dow rivals:
Company Ticker Total return - Sept. 4 through Oct. 3 Intel Corp. US:INTC 12% Home Depot Inc. US:HD 10% Chevron Corp. US:CVX 8% Goldman Sachs Group Inc. US:GS 7% Exxon Mobil Corp. US:XOM 7% Pfizer Inc. US:PFE 6% Boeing Co. US:BA 6% J.P. Morgan Chase & Co. US:JPM 6% American Express Co. US:AXP 6% Caterpillar Inc. US:CAT 6% 3M Co. US:MMM 5% Cisco Systems Inc. US:CSCO 5% DowDuPont Inc. US:DWDP 5% Verizon Communications Inc. US:VZ 4% Travelers Cos. US:TRV 4% International Business Machines Corp. US:IBM 2% Visa Inc. Class A US:V 2% Merck & Co. US:MRK 2% Wal-Mart Stores Inc. US:WMT 1% Johnson & Johnson US:JNJ 1% Microsoft Corp. US:MSFT 0% United Technologies Corp. US:UTX 0% UnitedHealth Group Inc. US:UNH 0% General Electric Co. US:GE 0% Procter & Gamble Co. US:PG 0% Coca-Cola Co. US:KO 0% Walt Disney Co. US:DIS -1% McDonald's Corp. US:MCD -2% Nike Inc. Class B US:NKE -4% Apple Inc. US:AAPL -6% Source: FactSet
Further, a significant amount of money is tied to so-called quant strategies. Many quant strategies -- based on computer models -- work on mean reversion. Managers with such strategies are buyers of Intel at this time. In plain English, it means that stocks that have not risen with the broader market are now likely to increase.
The strong group
Intel is the largest U.S. semiconductor company. The semiconductor group, as represented by semiconductor ETF (SMH), has been one of the strongest groups in the stock market. At late stages of an advance, historically the weakest stocks in a strong group tend to stage breakouts.
Dividend and valuation
The dividend and valuation will provide support in case there is a market decline. Intel's dividend yield is 2.86%. Intel also has a much cheaper valuation than its competitors.
Intel's Achilles heel has been its reliance on PCs. Personal computers have been in a long decline. This is the reason the stock has lagged not only the broader market, as represented by the popular S&P 500 ETF (SPY), but also the semiconductor group.
Intel has been trying to remedy the situation, as discussed below.
iPhone 8 and iPhone X
Intel has successfully diversified into a number of areas including modems for mobile devices. As an example, Intel's modem chip is in Apple's (AAPL) iPhone 8 and is likely to be in the iPhone X. Intel is successfully competing with Qualcomm (QCOM). As a caution for would-be buyers of Intel stock, there is a rumor that Apple is designing its own modems to replace Intel's.
Data centers have been a source of demand for CPU (central processing unit ) chips. Intel continues to be the leader. Still, it's facing a challenge from Advanced Micro Devices (AMD).
Artificial intelligence is the wave of the future. For artificial intelligence, Nvidia (NVDA) has been the leader. But Intel is gearing up to challenge Nvidia. Companies, including Alphabet (GOOGL), Microsoft (MSFT) and Tesla (TSLA), are working on artificial intelligence. Even though Intel is behind, it is likely to find plenty of opportunities. Intel recently unveiled an artificial-intelligence chip called Loihi that mimics the human brain using an old neuromorphic technology. This technology uses spiking neurons as the basic computing unit instead of the logic gates that are used in conventional processors
Intel acquired Altera, a maker of programmable logic chips, in 2015. These chips have applications in all sorts of industries, ranging from automotive to telecommunications. In the future, this acquisition may give Intel an edge in artificial intelligence.
Intel recently purchased Mobileye, a maker of systems for autonomous cars. This gives Intel a foothold in an important growth area.
Price target and how to buy it
The Arora Report's long-term target on Intel is $56 to $58. If Intel's stock rises, it may see profit-taking in the zone of $42 to $44, and then around $50.
In recognition that all investors are different, at The Arora Report we provide guidance on different ways of investing. Those buying today may note that the breakout is on a low volume and October tends to be a volatile month. So those buying now may want to scale in. And those who are more conservative may wait for a pullback into the buy zone of $35 to $37.63. There is a 70% probability of a pullback into this zone in the next 120 days.
Disclosure: Subscribers to The Arora Report (http://thearorareport.com/) may have positions in the securities mentioned in this article or may take positions at any time. All recommended positions are reviewed daily at The Arora Report.
Nigam Arora is an investor, engineer and nuclear physicist by background, has founded two Inc. 500 fastest-growing companies, is the developer of the adaptive ZYX Global Multi Asset Allocation Model and the ZYX Change Method to profit from change in trading and investing. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com (http://mailto:Nigam@thearorareport.com/).
-Nigam Arora; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires