Intel (NASDAQ: INTC) is a member of the Dow Jones Industrial Average, and the company finds itself in a critical juncture following the headlines’ success in 2020. After a year of operational challenges and two sharp falls in stock prices, new CEO Pat Gelsinger will soon take the reins gives the microchip giant the hope of making a strategic turnaround. This could represent a good boost for Intel shareholders over the course of a year or two, but even that potential growth may not make it a better buy than simply holding the entire Dow Jones.
Investing in indices can be a great way to diversify and reduce risk, but it usually means sacrificing part of the bullish potential of a more focused portfolio of individual stocks. Investors considering Intel above the Dow 30 need to determine whether Intel’s appreciation potential is large enough to justify the reduction in risk and volatility provided by a diversified index.
Intel at a crossroads
In 2020, Intel experienced some erosion in its dominant position in the market. Resurgent archrival OMG (NASDAQ: AMD) gained ground, and other competitors also outpaced the chip giant.
Intel is also tackling the challenge that top customers like Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT) are starting to design microchips for their own products internally.
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Last July, the company disappointed investors by announcing that the launch of its next-generation 7-nanometer chips would be delayed for a year. The semiconductor industry is highly competitive, and Intel had previously struggled to keep pace with its competitors in the previous generation of 10-nanometer chips. Being a laggard in the launch of next-generation chips will not only affect sales, but will also affect prices and profit margins. The news of the delay contributed to the shares fall 20% in July.
The problem continued in October, after Intel released mixed third quarter results with worrisome comments. The company exceeded sales expectations and increased its projection, but it fell short of GAAP profits and there was a sharp decline in demand among data center customers. After two big sales, activist investors at the Third Point hedge fund stepped in and demanded changes from Intel management to fix the problems plaguing the semiconductor giant. That involvement led the board to hire a new CEO, and investors hope that Intel can regain some of its lost market dominance.
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At this point, Intel’s valuation metrics seem relatively cheap for any optimistic investor. The shares are traded at a forward P / E ratio of 12.3, which is quite low in the current market. Its relationship between the company’s value and EBITDA of 6.4 is also attractive. This indicates that there is room for the valuation of the stock. However, its 2.3% dividend yield at current stock prices is somewhat mediocre, and this is especially relevant for a mature, low-growth company like this.
Diversification without sacrificing growth
Having an index, instead of a single stock, has advantages and disadvantages. Diversification dilutes the degree to which any hesitant individual company can drag its entire portfolio down, so having a large number of shares is good for reducing volatility. However, it also limits the impact that a single big winner can have on their total returns.
Intel can outperform the market if its current strategic shift successfully restores the company’s market dominance. However, Intel is not likely to generate large returns for investors through quick sales or profit growth. Owning the other 29 shares in the Dow Jones Industrial Index is unlikely to limit portfolio growth relative to Intel, but will greatly reduce risk and volatility. Dow is spread across several sectors and still offers plenty of exposure to areas of growth, such as technology, pharmaceuticals and cyclical consumer actions. In addition, investors can use ETFs, such as the SPDR Dow Jones Industrial Average ETF Trust (NYSEMKT: DAY) easily buy the entire index and receive dividend distributions that currently earn 1.8%, not far below Intel’s earnings.
It is difficult to identify a clear advantage that Intel shares have over a portfolio of all 30 Dow Jones shares, but the index offers an undeniable advantage in reducing risk.