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Tuesday, June 22, 1999

An Investment Opinion
by Warren Gump

Investing in Intel

It's happening once again. Analysts are raising concerns that problems Intel (NYSE: INTC) is having ramping up production of a new chip will impact earnings and therefore the stock price. According to news reports, the company has delayed by two months to November the introduction of a 600mhz chip based on 0.18 micron technology. Intel will still introduce a 600mhz chip based on 0.25 micron, but that one will likely cost Intel more to make because it requires a little more material. Over the past week, some analysts have cut estimates by up to $0.05-$0.10 per share to account for the delay.

Despite suggestions by the company that this delay will not impact earnings, there is no doubt a higher risk that earnings over the next couple of quarters could be impacted by the delay. Over the past year, competitor Advanced Micro Devices (NYSE: AMD) has gained substantial market share by offering chips for sub-$1,000 machines that Intel initially ignored. More recently, Intel has combated Advanced Micro with its lower-priced Celeron chip and aggressive price cuts. If Intel does not have a faster chip to offer than AMD, speculation abounds that price cuts will likely intensify, impacting Intel's overall margins.

These analysts could be correct in analyzing what might happen to Intel over the next quarter or two, slowing down the company's earnings growth. Such a situation would lead to some institutional and individual investors focused on short-term performance to sell or avoid the stock. Hence, over the past week, Intel is down about $4 to $55 11/16. At the current price, it is trading for about 24x earnings estimates for 1999.

If you are investing in Intel for the long haul, blips like what has occurred over the past week are irrelevant. The impact to Intel two years for now will most likely be nonexistent. Remember the scare when it was found that a version of the Pentium chip made a calculation error when doing esoteric calculations? That issue caused Intel stock to plunge because of fear that its market dominance would be destroyed. Looking back, it has had virtually no impact on the company whatsoever. The strength of Intel's technology and its market presence will likely lead to a similar situation. While some aspects of the company's plans for 1999 could be temporarily hampered, the delay shouldn't seriously hinder the company's overall competitive position.

Seeing so many people view a minor stumble by Intel as a major event leads me to think that people don't recognize that the manufacturing side of the microprocessor business is highly complex. One of the reasons that Intel has beaten competitors is that it has proven more adept at managing this challenging process. While most people accept Intel's expectations for production plans at face value, whenever Advanced Micro issues new chip and production plans, the game among investors is figuring out how much of a delay the company will encounter. It seems like Advanced Micro has seriously stumbled on every major product introduction in the past few years. Seeing Intel run into an occasional production delays should be expected as part of the business.

While holders of Intel stock may bemoan the fact that analysts and some shareholders change their opinion so quickly, you can turn such volatility into your favor using dollar cost averaging (DCA). With DCA, a shareholder invests a fixed dollar amount into a security at a specified interval, such as monthly or quarterly. The beauty of this strategy is that it causes you to buy fewer shares when the stock price is high and more shares when the price is low. DCA tends to be a strategy that works best when you find a security with terrific long-term prospects that might be subject to substantial short-term price volatility.

Here's how it works. Let's say you decided to start a dollar-cost-averaging program into Intel at the start of 1999 by investing $200 at the end of each month. Here is what your Intel investment plan would look like so far:

Share Shares Average
Date Price Purchased Owned Cost/Share

1/31 $70.47 2.838 2.838 $70.47
2/26 $59.97 3.335 6.173 $64.80
3/31 $59.48 3.363 9.536 $62.92
4/30 $61.19 3.269 12.805 $62.48
5/31 $54.06 3.700 16.505 $60.59

As you can see, after five months, you would have accumulated a stake of 16.5 shares at an average cost of $60.59. Notice that you picked up 3.7 shares on the dip in May compared to 2.8 shares in January? Because more shares were acquired when the stock price was lower, your cost basis per share is a little lower than the average share price of $61.03 during the period. By dollar cost averaging, you were able to increase the number of shares you owned and bring your average cost per share down below the average share price over your investment horizon.

DCA works best for companies that have dramatic stock price fluctuations on both the upside and downside by helping to ensure that you don't purchase all of your shares at a market peak. Even though Intel will probably be worth far more than $70 in a few years, it is nice to know that you didn't buy all your shares at what turned out to be a short-term high in late January.

When using a DCA strategy, it is imperative that you have confidence about the company's long-term outlook. The strategy doesn't work if you don't continue investing through the dips in stock price. For example, if you had decided to stop investing in February because of concerns about the company when the stock fell, you would be left holding only shares that were purchased at $70 a pop, without the rewards of buying shares at the lower price.

If you find companies with terrific long-term prospects, but significant short-term stock price volatility that scares you away, consider turning those price fluctuations to your advantage by starting a DCA program. The most cost-efficient way to implement such a strategy is through a dividend reinvestment plan with low costs; otherwise you could be stuck paying commissions that would eat away at the advantage of the strategy. Whatever you decide to do, remember that as an individual investor with a long-term perspective, there are several ways to take advantage of the myopia of other market participants.

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