The Feds Want to Buy Intel… Should You?

By Michael Salvatore, Editor, TradeSmith Daily

In This Digest:

Is it really that strange for the White House to buy Intel (INTC)?
TradeSmith indicators are screaming “stay away”…
The 67% of small caps that matter…
And the five that pass our strict quality filter…
About our February melt-up prediction…

The government wants to buy Intel, and it’s a little weird…

Last Friday, the White House confirmed that it intends to take a 10% stake in chipmaker Intel (INTC), worth $8.9 billion. It says it will use some of the grants from the CHIPS and Science Act to fund the purchase.

At first, this feels like the kind of thing that doesn’t happen in America. Direct investment from the federal government into publicly traded companies is the kind of story that gives free-market purists nightmares.

But the feds have a long history of using public funds for stock purchases. Just for different reasons and in different ways.

We only have to look back to the Great Financial Crisis for our reminder. Back then:

The government bought preferred stock and warrants in thousands of banks to prevent their destruction. One notable example was Citigroup (C). At one point, the government owned a 34% stake.
The Fed also bailed out insurance company American International Group (AIG) with a near 80% stake that it later unwound.
And the Treasury bought a near 61% ownership of General Motors (GM).

It goes back even further than that.

In the early 20^th century, the Hoover administration created the Reconstruction Finance Corporation. This fund invested in preferred stocks in banks, railroads, and other industrial firms to help the country recover from the Great Depression.

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But these were all emergency measures…

The government was buying stakes in these companies not because it wanted to, but because it felt it had to. Plus, the plan was always to unwind these investments once things settled down.

Intel is a systemically important firm for the modern age. The semiconductors from Intel and other firms like it go into all sorts of electronics across the world.

But unlike other companies the government has bought in the past, Intel is not in crisis. This is a proactive, rather than reactive move to build up the Sovereign Wealth Fund – a proposed government-led investment fund for our tax dollars.

Not just that, Treasury Secretary Scott Bessent suggested the feds could buy more stocks in the future… and President Trump chimed in to agree.

Does this present an opportunity?

History shows us that the government hasn’t taken an opportunistic stake in a public firm through common stock… maybe ever. At least not in the last 100 years.

And the White House says it could take stakes in other publicly traded companies, potentially via an American Sovereign Wealth Fund.

How will it work out? We don’t know.

But our beat here at TradeSmith Daily isn’t politics. We’re here to help you move the needle on your wealth by putting cold, hard data on your side.

And the cold, hard data does not support buying Intel.

First, INTC has traded sideways for the past year… during one of the strongest tech bull runs in history. Far worse than that, it has the embarrassing quality of trading at the same price it was at in September 1997. The great Will Rogers once said plainly on investing: “If it don’t go up, don’t buy it.” That may be the world’s simplest technical sniff test, but it’s hard to deny.

Second, the company’s fundamentals are not in great shape.

The company has no earnings, trading at a P/E ratio of minus 4. Its revenue has been in decline since 2021, from a peak of $79 billion to $53 billion today. That’s roughly the same level as 10 years ago. Finally, its gross profit margins are down from 56% in 2022 to 30% today.

Safe to say INTC is not on Warren Buffett’s radar.

So we have a stock that goes nowhere… and a business in decline.

It is a big business. And one that happens to make semiconductors, which are about as precious as gold right now… but it is nonetheless falling on two important measures.

You could do a deeper dive on INTC and see if there’s something in the more obscure fundamental metrics that we aren’t seeing here. Or you could use TradeSmith’s key fundamental indicator, the Business Quality Score (BQS).

The BQS crunches 21 different, highly impactful fundamental growth factors to form a simple 0-100 score. The higher the score, the better the business. Here’s how Intel stacks up:

This score rates a stock’s fundamentals on four weighted factors: Profitability, Growth, Safety, and Payout. All but Payout – which accounts for things like equity and debt issuance – is at low as it gets. That earns Intel a score of 5 out of 100.

Long story short, if you’re buying Intel because the White House is, you’re buying against the odds.

And you don’t have to look far for an alternative…

If you want to buy a U.S. chipmaker with great fundamentals, just keep it simple. Think about the stock that’s gone up a ton over the past couple years, and for good reason – Nvidia (NVDA).

Here’s Nvidia’s BQS:

It’s the mirror opposite of Intel. Nvidia rates a 95 out of 100 for its outstanding Profitability, Growth, Safety, and Payout factors. And that’s why investors have rewarded NVDA stock… while Intel has trended sideways.

The U.S. Sovereign Wealth Fund may wind up owning some great stocks. But our data shows that INTC is, for now at least, not one of them.

We’ll keep monitoring government investments here for you in TradeSmith Daily and let you know what our systems say about any new purchases…

And now, the other big news from Friday…

Fed Chair Jerome Powell took the stage at Jackson Hole last Friday to deliver his much-anticipated speech. Traders dissected every word, looking for clues that the long-awaited rate cuts would finally arrive at the next meeting.

They heard what they wanted to hear. Powell noted a “shifting balance of risks… which may warrant adjusting our policy stance.”

Most investors translated that as “rate cuts,” so the S&P 500 soared 1.4% on Friday.

But that was nothing compared to what the small-cap Russell 2000 index did. It jumped about 4% in the Friday session.

Investors rightly equate lower interest rates as a boost to small-cap stocks. Small-cap businesses tend to borrow money directly from banks – which reference the Fed’s key rate – rather than issue stock or bonds.

Rate cuts from the Fed means lower borrowing costs for small-cap companies… which means less debt servicing and more money invested in growth.

I can’t fault anyone for wanting to buy the Russell 2000 ETF (IWM) after this news. But I should point something out.

As of right now, only 68.2% of the stocks in that benchmark are in the Green Zone – our unique measure of a stock’s momentum. If a stock is in the Green Zone, it has positive price momentum that’s appropriate for its current volatility… as compared to what’s normal for that stock historically.

And nearly a quarter of them are in the Red Zone – meaning the opposite. Stocks in the Red Zone are in a downtrend measured by their historical volatility. And the Yellow Zone in the middle is a warning area, where stocks are threatening to enter the Red.

So if you’re buying the Russell 2000, you’re really buying 1,350 companies in a healthy state… and a bunch more that aren’t.

We can whittle that list down to only the best stocks very easily. And don’t worry, we can do a whole lot better than 1,350 for you to sift through.

Here’s a list of Russell 2000 stocks that aren’t just in the Green Zone, but are also in an uptrend… rate above 90 on Jason Bodner’s Quantum Edge score… and above a 90 on the Business Quality Score:

That takes a list of 1,350 down to just five. So if you’re looking to buy some high-quality small-cap stocks on the pretext of rate cuts from the Fed, this much smaller list is where you want to start looking.

Let’s check in on our February melt-up prediction…

Dedicated readers will recall that back in February, TradeSmith came forward with a bold prediction:

We thought then, as we do now, that markets are in a rare condition that has historically led to “Melt-Ups.” Think dot-com boom in the ‘90s… or the similar one triggered by the “quantitative easing forever” days of the 2010s… or by “Reaganomics” in the mid-‘80s.

This time around, the “Liberation Day” crash initially seemed to crack an egg on our face. But a lot has happened since April. As we stand today, stocks are up almost 10% on the year… and there’s still four months to go.

Previous Melt-Ups proved that this kind of price action can take you a lot farther than that. So, to help readers position their portfolios accordingly, we’re broadcasting an update to our February Mega Melt-Up presentation for a limited time.

In it, you’ll learn the names of 10 stocks perfectly positioned to ride this melt-up… and 20 more to avoid right now.

That way, you can make the most of this melt-up – for as long as it lasts – then bow out when TradeSmith signals the end of the party.

The Feds Want to Buy Intel… Should You?