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How to Trade One of the World's Great Legal Monopolies

By Dr. David Eifrig, editor, Retirement Trader
Monday, August 16, 2010

Just a few days ago, I told my Retirement Trader readers about a quick income opportunity in one of the world's greatest businesses.
 
The business is semiconductor giant Intel (INTC).
 
You could describe Intel as a $100 billion computer-chip maker. But that description shortchanges how marvelous this business is...
 
Intel is the dominant manufacturer of the most essential component used in computers. All of the name-brand computer makers – Microsoft, Dell, and Apple – rely on its processors. And nowadays, electronics makers use its chips to improve the brainpower of everything from ovens to garage-door openers.
 
To get a sense of what a colossus Intel is, realize it controls 80% of the global market for microprocessors. Its nearest competitor, AMD, accounts for just 10%. INTC made $4.3 billion in net income last year. AMD is struggling to break even this year, regularly losing hundreds of millions a quarter.
 
Other competitors exist, but they can't match INTC for quality, price, or brand loyalty. For all practical purposes, Intel has no competition. It's a virtual monopoly.
 
INTC is also loyal to its shareholders. It pays an annual cash dividend of 3.2%. It has returned $16 billion in dividends ($8.8 billion) and share buybacks ($7.2 billion), nearly a 5% return year after year to shareholders. It also has invested in the future success of the business. It spent nearly $10 billion a year on research, development, and equipment each of the past three years.
 
Although Intel has all of these wonderful attributes, you wouldn't know it by asking Wall Street. The stock is trading for just 2.5 times book value, 2.5 times sales, and less than its growth rate at a P/E ratio of 9.4. The company achieves profit margins of 23% and operating margins of 33% – at the level of some of the best businesses ever.
 
Now here's the income opportunity...
 
As you can see from the chart below, Intel traded up to $24 a share in May... but has fallen back to $19.50 this summer. This is an area where buyers typically step in to buy cheap Intel shares...
 
 
If you're a stock trader, you can buy Intel for a quick pop higher. But there is a much bigger opportunity in Intel options.
 
Recently we've seen an increase in volatility in the market, which means fatter option premiums. Intel options have plumped up to a level you wouldn't normally find in such a stable company.
 
If you're good with options, consider selling a round of puts at these levels. It's also an attractive setup for covered call trades.
 
Bottom line: There's plenty of fear in the market right now... which is creating huge option opportunities in big blue-chip stocks like Intel. I doubt it will last long, so get moving on this legal monopoly.
 
Here's to our health, wealth, and a great retirement,
 
Doc Eifrig




In The Daily Crux
Market Notes
Gunmaker Smith & Wesson strikes new 52-week low.
 
California land giant Tejon Ranch strikes new 52-week low.
 
Secondary education stocks continue to get obliterated... industry leaders Apollo Group and Corinthian Colleges both down more than 38% in the past four months.
 
Bad sign for retail... Nordstrom hits lowest low since November on super-high-volume selling.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1079.38 +0.0% +7.5%
Oil 33.61 -0.5% -6.7%
Gold 119.73 +0.8% +28.7%
Silver 18.00 +1.5% +24.7%
US-Dollar 82.43 -0.6% +4.7%
Euro 1.28 +0.5% -9.7%
Volatility 26.10 -0.5% +7.5%
Gold Stocks 461.59 +1.7% +29.1%
10-Year Yield 2.58 -4.1% -27.5%

World ETFs
Symbol Price
Change
52-Wk
USA 108.26 -0.1% +7.4%
Canada 25.73 -0.2% +8.9%
Russia 18.50 +0.3% +4.2%
India 32.50 -0.1% +19.4%
Israel 14.70 +0.4% +12.2%
Japan 9.51 +0.7% -5.8%
Singapore 12.04 +0.3% +17.6%
Taiwan 12.62 +0.6% +13.0%
S. Korea 48.36 +0.2% +16.5%
S. Africa 59.68 +0.6% +20.8%
China 40.50 +1.1% -1.3%
Lat.America 46.44 +1.2% +18.9%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 102.44 +0.2% -1.2%
Big Pharma 61.14 -0.2% -2.6%
Internet 54.83 +0.9% +19.9%
Semis 11.95 +0.0% -0.8%
Utilities 30.70 +0.0% +5.7%
Defense 16.37 -0.6% +9.4%
Nanotech 8.35 +0.6% -15.5%
Alt. Energy 8.77 +1.4% -14.0%
Water 15.28 +0.9% -3.1%
Insurance 14.53 -0.2% +8.8%
Biotech 18.23 +0.2% +14.0%
Retail 15.87 +0.3% +4.6%
Software 20.25 +0.2% +10.4%
Big Tech 44.80 +0.2% +13.1%
Construction 11.16 +0.0% -7.2%
Media 11.42 -0.4% +18.1%
Consumer Svcs 56.06 -0.1% +14.4%
Financials 50.63 -0.1% +0.7%
Health Care 59.80 -0.4% +5.0%
Industrials 54.03 -0.1% +15.1%
Basic Mat 59.19 +0.5% +15.4%
Real Estate 50.48 +0.1% +27.8%
Transportation 76.02 -0.1% +14.3%
Telecom 20.11 +0.4% +14.0%

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