Intel's Calls Are a Cheap Way to Bet on Innovation

Within 10 years they'd split so many times and their value had climbed so fast that my basis was negligible. Given Gates's own massive commitment to philanthropy, I hope he'd be pleased that I've been steadily giving those shares away to charity, as I did again this past December.

Given my efforts to whittle down these positions (fortunately I'd given a lot away by the time of the tech collapse), I haven't thought much about buying them. These once cutting-edge, high-growth, 1980s icons have turned into mature — some might say plodding — stalwarts of the Dow Jones Industrial Average, about as cutting edge as disco. As the Internet threatened to leave them in the dust, just as they once streaked past IBM, investor interest gravitated elsewhere. I can't say anyone really dislikes these big tech names. It's more that they don't pay any attention.

And then last year I started hearing more talk about the likely resurgence of large-cap growth stocks, a category that has persistently lagged value and small cap since 2000. Microsoft and Intel shares had gotten so low, and their price/earnings ratios so modest, that it wasn't even clear they still qualify as growth stocks. As I wrote last year, Microsoft was beginning to show up on value screens and in value-oriented mutual funds. Perhaps because of investor boredom, there was little premium to be found in MSFT call options. And so I bought some.

To my pleasant surprise, the large-cap-growth scenario seemed to catch on in last year's final quarter, and those Microsoft options are now showing some handsome gains. Last week, Microsoft reported encouraging earnings, even though they were somewhat distorted by delays in shipping the new Vista operating system, which finally went on sale this week. Intel shares also rallied modestly by the end of last year, but they still ended up as the worst-performing component of the Dow Jones Industrial Average. Shares sagged further when Intel reported disappointing earnings on Jan. 16. Signs of an ongoing price war with archrival Advanced Micro Devices (AMD) further depressed sentiment.

And so it was last week when, out of curiosity, I took a look at prices for Intel calls. I noticed that the premium amounted to only pennies a share.

I wasn't planning to buy any, but I couldn't resist this level of a bargain. With the successful Microsoft experience still in my mind and Intel trading at slightly over $20, I bought the $10 calls expiring in 2009 for just over $10 a contract. Yes, you read that right — 2009. That's nearly two years, for which I paid a premium of a few cents.

One of the raps on Intel is that it has lost its technological edge, and by making chips that are essentially fungible with AMD's, its profit margins have been eroding. I've always thought the AMD price war threat was overblown. They're basically oligopolists, and after a little skirmishing, I expect them to return to mutually beneficial rational pricing. That aside, I've always felt it a mistake to underestimate Intel's research and development prowess. Still, I had no idea that Intel was about to announce a major technical breakthrough that could yield a new generation of super-fast, energy-efficient chips. But there it was, the lead story of Saturday's New York Times.

I'm not a scientist or engineer, so I'm in no position to evaluate the significance of Intel's achievement. IBM was quick to claim that it, too, was on the brink of a similar advance, though one aimed at a different market. But the news reminded me of my lunch with Bill Gates all those years ago, and his emphasis on the potential advances in chip technology.

The market didn't seem to get very excited by Intel's news, with Intel shares showing only modest gains on Monday. That's good news for potential Intel investors, because, when I checked, those Intel calls were still amazingly cheap. The $10s of 2009 were quoted on Monday at $11.15, with Intel shares at $20.89 — a premium of just 26 cents per call. (The premiums rise as the strike price climbs.) For that outlay, you secure a position in the world's leading chip maker with the largest R&D budget, with $6 billion in cash, and the tailwind of an exciting new technological breakthrough. That sounds like a large-cap-growth story to me.