Prudent Picks? Apple and Intel

03/12/2020 5:00 am EST

Focus: TECHNOLOGY

John Buckingham

Principal, Portfolio Manager, and Editor, The Prudent Speculator

Though we are braced for additional downside in the near-term, we think that COVID-19 will eventually run its course and we still like the long-term prospects of our stocks, notes John Buckingham, editor of The Prudent Speculator. Here, the value investor looks at two tech stocks from his model portfolio.

We concur with Warren Buffett who said, “It is scary stuff, but I don’t think it should affect what you do in stocks. There’s always trouble coming. The real question is where are businesses going to be in five or 10 years.”

Corrections and even rear markets will happen, but they always have been overcome in the fullness of time. Indeed, capitalism’s immune system is quite strong.

Apple (AAPL) fell hard as February ended, as the consumer electronics darling dealt with fear of a significant coronavirus-related impact to its sales and operations.

Apple issued a guidance update, which stated that iPhone supply will be constrained (albeit temporarily) and Chinese demand for Apple products is expected to fall. As a result, Apple said that it will come up short in its fiscal Q2 results.

CEO Tim Cook said of Apple’s supply chain, “The question for us is: Was the resilience there or not? And do we need to make some changes? My perspective sitting here today is that if there are changes, you’re talking about adjusting some knobs, not some sort of wholesale fundamental change.”

Though he added that the coronavirus issues are a “temporary thing,” the production and demand impacts are likely to weigh on results for a few quarters at least.

However, we think the longer term remains highly attractive and we continue to like Apple’s seamless ecosystem, while the recent sell-off affords another opportunity to pick up a superb company with a terrific balance sheet, global income stream, reasonable valuation and plenty of growth potential.

Intel (INTC), the leading global semiconductor manufacturer, supplies advanced technology solutions for the computing industry, including microprocessors, chipsets and motherboards.

Thares fell from a high of $68 in January, as chipmakers were heavily impacted by COVID-19 worries and INTC investors were spooked when Microsoft reported a reduction in Personal Computing segment sales guidance.

Intel is no stranger to supply and demand interruptions and we expect the coronavirus impact to be no different. However, the company’s products are longer-lived in nature, while enterprise purchases of hardware and cloud services have time horizons measured in years.

We note that Intel struggled in 2012 and 2013 yet was able to right the ship and string together good performance for most of the six ensuing years.

While we may encounter bumps in the road, Intel is finally executing on the 10-nanometer chip production ramp and we expect that the near-term headwinds will turn into long-term tailwinds. We continue to like the company’s diversified revenue stream, low levels of debt, forward P/E ratio below 12 and 2.4% dividend yield.

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