- Expect some air to come out of the red-hot ‘reflation’ trade
- Intel – a solid “value” stock (at the right price)
- Initial weekly unemployment claims remain very high – above 700K
The trading story for the past 30-days (or so) has been all about the reflation trade (i.e. the rotation into “value stocks”)
You might also say it’s the return of beta names – where almost a year’s under-performance is now translating into over-performance in a very short space of time.
For example, take a look at the 2020 returns for each of the following ETFs and Indices
Value vs Growth 2020
The Nasdaq has eclipsed the return of all other stocks and sectors… as the FAANGs was the preferred “stay at home” trade – with their fortified balance sheets and unmatched cash flows.
However, note the pink and green lines on this chart:
1. iShares S&P Mid-Cap 400 Value ETF (pink); and
2. iShares S&P Small-Cap 600 Value ETF (green)
These two under-performing beta ETFs are now clawing their way back to post almost positive returns for the year – after being down ~45% in March.
Now if I change the time frame to show November’s performance (i.e., once we had news of a vaccine) – look at what happened:
Value outperforms Growth for November 2020
Small and mid-cap value stocks have posted 20%+ returns in November… approx double that of their “safer/larger” S&P 500 peers.
As I say, the sector is white hot.
However, it’s too hot for me.
For anyone trading this sector – don’t be surprised to see some “hot air” to come out of the “value” trade in the next few weeks.
In fact, we saw a mini sell-off today in this sector when Pfizer said that storage, distribution and administration remain significant challenges – meaning only half of their anticipated vaccine volumes could be disseminated.
As an aside, regular readers will recall me saying these three things remain unanswered… and a massive challenge when trying to distribute and administer a vaccine which requires storage at negative 100 Fahrenheit.
That said, a pullback in this sector (and the broader market) will be important to set the stage for a more sustainable rally in 2021.
Going Back to the “Income Well” on INTC
Now talking of “value” (or non-growth) stocks…. one I like is Intel (INTC)
To set the scene – in August – I alerted readers to a potential trade – where I felt the stock was oversold after some disappointing news (and a poor quarter)
In July – INTC announced its next generation of microchips (7nm) would be delayed for six months due to manufacturing issues.
This was a disaster for the chip giant – as they gifted a lot of market share to its competitor AMD.
The company was then dealt a second blow not long after – when Apple announced it would no longer use Intel’s chips – having developed its own chip “Apple Silicon”
And whilst a repricing of Intel was warranted – at $40 to $44 – the stock was looking like very good value.
From mine, whilst the numbers were not great, they were “solid”. Here’s what I shared in August:
- 2.6% dividend yield at the current price ($44)
- 2.6x sales ration (vs AMD 9x)
- Growing at approx 7% pa (i.e. not in decline); and
- Owns ~90% of the Data Centre chipset market.
As it happens I made a 10% annualized return on my trade.
However, towards the end of October (week of the 26th), I was given another great opportunity to repeat it for approx 15.1% annualized… selling $40 Dec 18 Puts for $0.83
Here’s the quick math on the calculating the annualized return (with 50 days to expiry)
(($0.83 / $40)*365 / 50) = 15.1%
With the stock trading around ~$44.00 (at the time) – it crept back onto my “value” radar (as it did back in July) . I was also watching it because of the strong support level at ~$42 (as we see below with the weekly chart)
INTC – 2016 to 2020 – Support at $42
From a fundamental perspective – there’s a few good reasons to put INTC on your value list.
First up is its safe and reliable dividend yield (and why potentially getting the stock at $40 (if I was exercised) made a lot of sense)
Intel has been paying a dividend since 1992… never skipping one. And whilst there have been numerous economic ups and downs the past 30 years – due to its reliable cash flow – INTC has always been able to pay out to shareholders.
Now Intel’s current payout is 33 cents a quarter or $1.32 a year.
If we assume a buy price of $40 (the strike price I sold the Put options for) – that’s good for 3.3%.
Not bad in this environment.
What’s more – most of INTC’s shareholder friendliness is in the form of buybacks.
Last year the company spent $13.6 billion to retire outstanding stock shares (i.e., in turn making each remaining share more valuable)
After briefly suspending its buybacks earlier this year, the company is on track to buy back another $10 billion in shares. This will boost the share price.
And finally, INTC will most likely record very strong revenue and free cash flow this year. And if this is the case, then this very shareholder-friendly company will continue to raise their payouts.
Put this on your value stock radar – especially when it’s trading close to that long-term support level.
Before I close – tomorrow we get the all-important November monthly jobs number.
The market is looking for around 500,000 private sector jobs added.
As a preface, today we received new initial weekly jobless claims — which totaled 712,000
Initial claims remain stubbornly high – especially when compared to the consistent ~200,000 per week we saw prior to the pandemic.
As I say – there’s a lot of work in front of his to heal this economy.
The reason tomorrow’s number is key is it could influence the size (and timing) of the next round of fiscal stimulus.
A stronger than expected number may dampen Mitch McConnell’s enthusiasm to support something north of $2 Trillion (requested by the Dems).
On the other hand, a weak number with a “4-handle” could inject some greater urgency.
The market wants (and expects) a meaningful spending bill to be signed in February. That’s not yet certain and will also depend on who controls the Senate from Jan 5th (following the two Georgia run-off elections).
And if the $2T+ isn’t coming – don’t be surprised to see stocks recalibrate (i.e., directly hitting reflation names)
Regards,
Adrian Tout
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