BMO’s $1.65 million autocalls on Intel offer value alternative to bull play, contrarian says

By Emma Trincal

New York, June 17 – Bank of Montreal’s $1.65 million of autocallable notes with a contingent coupon due July 17, 2023 linked to the common stock of Intel Corp. present the advantage associated with the pick of a good value stock, said Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments.

The notes will pay a monthly coupon equal to 10.25% per year if the stock closes at or above its coupon barrier level, 60% of its initial price, on the relevant observation date, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be automatically redeemed at par plus the contingent coupon if the stock closes at or above its initial price on any monthly observation date after six months.

If the notes are not called and the stock finishes at or above 60% of its initial share price, the payout at maturity will be par plus the final coupon.

Otherwise, investors receive a number of shares equal to $1,000 divided by the initial share price or, at the issuer’s option, the cash equivalent.

Bullish

Kaplan said the choice of the underlying was always a key consideration in assessing the quality of a structured note investment. He liked Intel for its valuation and growth prospects.

“I’m long the stock. I add to my position incrementally when the price goes down,” he said.

The stock closed at $39.18 on the trade date but finished on Friday at $36.97, or 5.6% lower.

“I actually bought shares on Thursday. I’m very bullish on Intel. I expect the stock to trade a lot higher next year,” he said.

Low P/E

Kaplan said he looks for stocks whose prices are depressed as long as he also sees value. Intel has dropped 36% from its 52-week high of a year ago, he noted.

“It’s good to see a lower price, but I’m not just looking at the chart. I want to see a low P/E,” he said.

“Intel is particularly attractive because its P/E ratio is much lower than its competitors.”

Intel’s price-per-earnings ratio is 6.2.

The company designs and manufactures microprocessors found in PCs and servers. Its main competitors are Advanced Micro Devices, Inc. and Nvidia Corp. with P/Es of 30.60 and 41.85, respectively.

As another indicator that Intel’s share price is undervalued: its current P/E is below its 7 to 13 range, he noted.

Growth

But what really signals the quality of Intel as a value pick is the relation between its P/E and the profit growth of the company.

“Intel has a profit growth of 9%, which is higher than its P/E. The stock is a bargain,” he said.

On the other hand, Nvidia and Advanced Micro Devices have P/Es that exceed their growth rates, he said.

“Intel is a much cheaper stock.”

Insiders

Kaplan closely follows insider activity using top executives’ purchases as a potential buying signal.

“As recently as May, the CEO and CFO were buying shares of Intel. It’s not very common in the semiconductor industry right now.

“I see those purchases as a sign of confidence insiders have in their own company,” he said.

Another positive indicator has been the absence of insider selling so far this year, he noted.

“We’re in a bear market and the share price of Intel could drop more, he said.

“But you have to be patient. When something has such great value, you hold on to it. During bear markets, people look at their portfolios and panic. They tend to dump their stocks indiscriminately, including undervalued stocks that have some good growth potential like Intel.”

Income play

The structure of the notes was relatively attractive, he said.

“The underlying and the timing are right, but the terms are good too,” he said.

“If you’re very bullish on Intel, you just buy the shares. As the price declines, you add more to your position. I have good-till-canceled orders all the time. And you patiently wait.

“However, if you don’t have such strong conviction, if your primary goal is income, the note is not a bad thing,” he said.

“I would prefer cumulative coupons, so you never miss a payment.

“But the 40% barrier is reasonably generous. The stock is already quite depressed...another 40% drop in the share price would push the P/E below 4. That’s very unlikely.”

Kaplan said he also liked the call protection for the first six months.

“At least you get some minimum return. It’s an additional benefit although it’s always possible that the stock could remain depressed even after six months. You may get called in seven or eight months,” he said.

“I see the stock continuing to trade lower for an unknown number of months. Perhaps the weakness could last in the next half a year. It’s a guess.”

But at least the barrier level and current valuation of the underlying increased the odds of getting paid, he concluded.

“This is a decent alternative to a long position for someone who is not overly bullish,” he said.

BMO Capital Markets Corp. is the agent.

The notes settled on Wednesday.

The Cusip number is 06369NCB5.

The fee is 2.15%.

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