December 23, 2012 in Business

Motley Fool: Intel shares ridiculously undervalued

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Shares of microchip giant Intel (Nasdaq: INTC) have fallen quite a bit over the past year, presenting a nice opportunity for investors.

What’s going on? Well, some worry that the market for PC systems is shrinking, that Intel has failed to stake a serious claim on the mobile computing market that’s replacing PCs, and that Apple is considering ditching Intel’s chips in many of its machines.

The risks facing Intel are substantial, but with or without direct involvement in tablets and smartphones, those mobile gadgets will always need to be fed data from large server systems – which happens to be Intel’s bread and butter. The rumors of Intel’s death are hugely exaggerated.

With a P/E ratio recently below 9, the stock is ridiculously undervalued when you consider Intel’s fortress-like market presence. On top of that, Intel has a tendency to buy back a ton of shares when the stock gets crazy cheap. There’s a $6.3 billion buyback authorization on the table today, and the board of directors would be happy to expand it as necessary. That’s the kind of opportunistic buyback that creates shareholder value rather than destroying it, and a serious rocket booster for long-term share prices.

Meanwhile, the stock offers a fat dividend yield above 4 percent. (The Motley Fool owns shares of Intel and Apple, and its newsletters have recommended both.)

Ask the Fool

Q: What is a “business model”? – L.D., Springfield, Mo.

A: Sorry, but it’s not Warren Buffett in a suit on a runway. A business model is how a company makes its money. A typical silver company’s business model involves exploring for silver and then extracting and selling it. But it doesn’t have to work that way.

Silver Wheaton, a successful silver-focused company, makes much of its money by financing other silver companies – in exchange for the right to buy some of the silver they produce at favorable prices. That business model is far less capital-intensive, as it doesn’t involve lots of mining labor and equipment. It reduces risk, too.

Somewhat similarly, eBay (a Motley Fool Stock Advisor pick) is a marketplace without expensive stores, inventory or cashiers.

When evaluating a company, assess how attractive and profitable its business model is. Will it permit the firm to grow quickly and to fend off competition? Is it expensive to maintain?

Q: If my stock splits 2-for-1, what happens to my cost basis? – R.Z., Houston

A: Your basis splits 2-for-1 along with the stock. Imagine that you bought 100 shares of Meteorite Insurance (ticker: HEDSUP) for $60 each, paying a $10 commission. Your cost basis is $6,010 – or $60.10 per share. After the split, you have 200 shares and your basis is still $6,010, or $30.05 per share.

Always add the purchase commission to your cost basis and subtract the sale commission from your proceeds – you’ll save a few tax dollars that way. If you’re paying a lot more than $10 per trade in commissions, you might want to find a less expensive brokerage. Learn more about brokerages at broker.fool.com and sec.gov/answers/openaccount.htm.

My dumbest investment

My dumbest investment was stock in Rainforest Cafe, which I held and held. Learning when to sell, or, rather, admitting a mistake, is hard. The dream is now a nightmare. I’m older and, I hope, wiser now. – J.H., online

The Fool responds: Keep up with your holdings regularly to make sure that the reasons you bought are still valid. Consider selling if a stock seems significantly overvalued – if it has appreciated so much that it’s more likely to fall than rise in the remaining time that you expect to hold it. You might also consider selling if you’re just not as confident in it as you used to be, or if you find much more compelling investments elsewhere.

Selling and buying frequently can generate a lot of commission costs, though, and can result in short-term gains, which are taxed at a higher rate than long-term gains. Never hold on to a loser just because you have a remote hope that you’ll make your money back. Move the money into something you have more faith in, and make the money back there. Invest only in your best ideas.


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