(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Intel Corp. (INTC) stock has seen a steep pullback in the past few weeks, falling by nearly 13% since the start of June. But that pullback may soon be in the rearview mirror, as options traders increase their bets that shares of Intel will rise by 15% by the beginning of next year. (See also: Intel's Soaring Stock Is Due for a 10% Pullback.)
The stock started reversing in early June and received a crushing blow later in the month when the CEO abruptly resigned. But the steep decline in the stock has pushed its valuations to nearly its lowest levels in about three years at just 11.8 times 2019 earnings estimates.
Options traders have been increasingly betting shares of Intel will rise by expiration on Jan. 18, 2019. The long straddle options strategy implies that shares of Intel may rise or fall by about 16% by expiration from the $50 strike price, placing the stock in a trading range of $42 to $58. But the number of calls outweigh the number of puts by a considerable 7 to 1, with 115,000 open call contracts. The dollar value of those open call contracts is even more impressive, at a stunning $45.4 million, a large wager given the length of time until expiration.
A 15% Jump
Additionally, the $55 strike price calls for the same expiration date have also seen their open interest levels rise and are currently at roughly 34,000 open contracts. Since the start of June, the number of $55 calls have climbed by nearly 10,000 contracts and now trade at approximately $2.00 per contract. A buyer of the calls needs the stock to rise to about $57 for the options to break even if held until expiration, a gain of about 15% from the current stock price of $49.75.
The steep decline in the stock has also resulted in the valuation of the stock falling to the lower end of its historical range, at just 11.8 times 2019 earnings estimates of $4.15 per share. Historically Intel has traded in a range of 11 to 14.5 times one-year forward earnings estimates, since 2016. Additionally, analysts have been steadily increasing their earnings forecast for the company since the start of 2018.
Intel's stock was hit hard recently, but the outlook for the stock may be getting better. The earnings results due in July will likely be critical in determining the longer-term direction of the stock and if the bets being placed will prove profitable.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.