Two weeks ago, I outlined my plans to create a portfolio of 10 companies that all have one thing in common: They provide a basic need or deliver life's necessities. It's my contention that basic-needs companies can offer investors stability and growth throughout any market environment thanks to consistent demand, incredible pricing power, and delectable dividends. This portfolio, which I have dubbed the Basic Needs Portfolio, will be pitted against the S&P 500 over a period of three years with the expectations of outperformance for all 10 stocks. I'll be rolling out a new selection to this portfolio every week for the next eight weeks.

You can review last week's inaugural selection of Waste Management, here.

Today, I plan to introduce the second of 10 selections to the Basic Needs Portfolio: Intel (INTC -0.76%).

How it fits with our theme
Right now you're probably scratching your head and wondering how a cyclical business like semiconductor chips could possibly be considered one of life's necessities. I'll freely admit that when I thought of the tech sector, my first notion was to go with an Internet or search company, since they're the primary source of content distribution nowadays.

But think about it this way: What's powering the laptop, smartphone, desktop PC, or television that you're getting your content from? Bingo ... a microprocessing chip. Intel absolutely dominate the microprocessing market when it comes to laptops and desktop PCs, garnering 85.2% of total market share according to Mercury Research in the first quarter.

This, of course, does have a lot to do with Advanced Micro Devices' (AMD 1.77%) struggles and ongoing restructuring, which will refocus its business on gaming and cloud-based products. AMD can count chip wins in the upcoming Xbox One console and the PlayStation 4 as positives, and shareholders have to be pleased with the progress of its turnaround which included a much smaller first-quarter loss than the Street had expected of just $0.13. Yet when all is said and done, AMD is still losing money over the interim, and Intel's market share figure is nonetheless impressive.

Source: nDevilTV, 

Intel is also working its way into the smartphone and tablet market via an ongoing partnership with Microsoft (MSFT 0.40%) while angling its investments for the future toward cloud-based hardware. It's nearly impossible to make it through your day without running across a handful of technology-based items that run off of some form of microprocessor. This, I think, makes Intel the perfect basic needs selection.

The risk
The most obvious risk with Intel is that's in the process of transitioning its chip production from being PC-based to cloud-based. The PC market is dwindling rapidly with the proliferation of tablets and smartphones, which could place added margin pressure on Intel if it doesn't invest heavily in developing next-generation chips capable of powering cloud-based servers as well as smartphones and tablets. Research firm IDC, just last week, dropped its PC unit sales projections to minus-7.8% for this year with the expectation of another 1.2% drop in 2014.

Another factor working against Intel is that, despite its size, it's still a small fry and new entrant into the smartphone market. Its Clover-Trail dual-core x86 Atom chip could be a game-changer ... if it manages to gain any traction in a very crowded market. The concern here is that Qualcomm's (QCOM -0.37%) Snapdragon chip is the dominant force in mobile processing with 43% of all market share, and, as the only vertically integrated mobile company, can provide the complete package for mobile product developers. As an example, Qualcomm also recently introduced its revolutionary RF360 chip, which can handle RF band fragmentation up front, thus eliminating the need for an RF chip, and placing all of its LTE platforms under one family of chips. These RF360 chips will be available in the second-half of this year. 

Even relatively new entrant NVIDIA (NVDA 0.81%) could pose trouble for Intel with its new quad-core Tegra 4i LTE-capable chips. Even though these new chips are energy-sucking battery vampires, NVIDIA is able to translate its graphics expertise over to its new line of processors to produce extremely high-quality images for people who use their smartphones as gaming devices.

Why Intel?
The primary reason I've been attracted to Intel isn't its recurring dominance in the PC market, but because of its potential in becoming the dominant force in big data-center hardware. Intel is already supplying a line of processing chips being used in Cisco Systems' new line of cloud-based servers. Furthermore, Intel's management team is forecasting that 30% of the company's revenue could come from the cloud by the end of the decade. 

Another area where Intel presents an immense growth opportunity is in mobile. I'm not as convinced it'll be able to make a huge dent anytime soon in the smartphone arena, but it has made strong inroads into the tablet market via Microsoft's Windows based platform. In Strategy Analytics preliminary first-quarter tablet operating system market share results, Windows improved from having 0% share in 2012 to 7.4% in 2013. This is crucial, as Intel chips absolutely dominate Windows-based architecture. If this trend continues, Intel's new mobile processors could gain some credibility among industry leaders and gain adoption in the highly competitive smartphone market.

Finally, this is a simple case of valuation, cash flow, and shareholder perks. Relative to the S&P 500, Intel is valued at nearly a 40% discount to cash flow (6.2 versus 9.9 for the S&P 500) while averaging $9.8 billion in free cash flow generation over the past three years. All of this cash certainly isn't going to waste. It's fueling Intel's aggressive R&D programs and adding to the $6 billion in bonds Intel sold in December to aid in its share repurchases and general corporate purposes.

*Assumes quarterly payout of $0.225 for the remainder of 2013. 

Most importantly, Intel's cash flow helps support a delectable dividend, which is currently yielding 3.7% and has grown by a whopping 1,025% over the trailing 10-year period.

Stay tuned next week, when I'll unveil the third selection to the Basic Needs Portfolio