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Sometimes you do not have to settle for low quality to get a bargain price.


(INTC) - Get Intel Corporation Report

is the world leader in its field, sports a pristine balance sheet and even pays a 3.33% dividend. Amazingly, INTC also trades at less than 10x projected earnings for 2010.

That is as low a valuation for INTC as has been seen in more than 20 years. The shares closed Monday at $18.93 -- off 22.3% from its $24.37 high last April. You would think there must have been some bad news to account for the drop, but first-half earnings were $0.94 this year versus just $0.04 in 2009. Consensus views for 2010 now run about $1.95- $1.99, and Standard & Poor's expects 2011 to come in at $2.11.

Here are the historical numbers as reported in the July 9, 2010 issue of Value Line:

Intel (INTC) EPS
Source: Value Line

View Chart

The P/E has never been lower nor the yield higher, in any of the time periods since 1994. Intel appears well on the way to an all-time record earnings year as well. Value Line rates both INTC safety and financial strength with its highest ratings. What's not to like?

Here is a look at the one-year chart to show you just how low INTC is right now and where it has been quite recently...

Intel (INTC) One Year
Source: Morningstar

View Chart

It does not seem a stretch to think that Intel could rebound to at least $22.50 over the next 16 months. That would be less than 11.5x earnings, and below S&P's 12-month target of $25.00 and Morningstar's fair value assessment of $23.00.

Based on that relatively conservative goal, I am recommending a buy/write at the 22.50 strikes going out to January 2012.

If Intel rises to $22.50, or higher (up 18.9%), by January 21, 2012:

¿ The calls will be exercised and the puts will expire.

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¿ You will sell your shares for $22,500.

¿ You will have received at least $787 in dividends.

¿ Your final position will be no shares and $23,287 in cash.

This best-case scenario would bring you a net profit of $23,287 - $12,630 = $10,657.

$10,657/$12,630 = 84% cash-on-cash achieved in about 16 months.

Should Intel surprise me by remaining below $22.50 on January 21, 2012:

¿ The calls will expire and the puts will be exercised.

¿ You be forced to buy another 1000 INTC and to lay out an additional $22,500.

¿ You will have collected at least $787 in dividends.

¿ Your final position will be 2000 INTC shares.

The 2000 shares would have cost $12,630 + $22,500 - $787 = $34,343 = $17.17 per share. INTC could drop by as much as 9.2% without causing a loss on this trade. That $17.16 break even is lower than the 52-week lows in four of the past seven years, including 2010 YTD.

Summary: Intel is a world-class company at a rock-bottom valuation. Any rebound of 19% or better will translate into an 84% total return for us in just 16 months. We've locked in a 9.2% margin of safety in case of unexpected market action.

Trades: Buy 1000 INTC for $18.93 per share, sell to open 10 INTC January 2012 22.5 calls at $1.10 and sell to open 10 INTC January 2012 22.5 puts at $5.20.

At the time of publication, Paul Price was short INTC puts for January 2011 and January 2012.

Dr. Price joined Merrill Lynch in 1987 and over the next 13 years worked with A.G. Edwards, Wheat First and Ferris, Baker Watts. Dr. Price enjoyed enough success to retire in October 2000, but he continues to write and give investment seminars.

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