Don’t Be Swayed By the Intel Bulls

02/28/2008 12:00 am EST

Focus: STOCKS

Beth Gaston Moon

, Schaeffer's Investment Research, Inc.

Beth Gaston Moon, senior editor of Schaeffer’s Investment Research, says a recent bullish article on the giant chip maker should be a sign of caution, not celebration.

A recent article in Barron’s Online ("Intel is Poised for a Comeback”—subscription required) kicks off with a rousing jolt of optimism, proclaiming: "Though its shares have lost a quarter of their value in just three months, Intel is actually sitting pretty." Author Tiernan Ray notes that Intel (NASDAQ: INTC) clobbered its main competitor, Advanced Micro Devices (NYSE: AMD), putting its smaller peer "on the ropes,” and predicts strong earnings growth for the next half-decade.

Cost-cutting measures and downsizing efforts should work for the company as they move forward, and ramped-up emerging-market demand for personal computers (PCs) should keep revenue growth afloat. Even if PC demand doesn't meet expectations, Intel is now moving along at a more efficient clip.

Given its recent pullback, the article says, Intel is now a more affordable buy, with a reasonable price-to-earnings multiple that is well below that of the Standard & Poor’s 500 Index and dramatically lower than the stock's own P/E ratio in late October.

While there are concerns, such as slowdown in the US economy that could trickle down into waning demand for PCs, this piece concludes that "the big selloff in Intel shares is surely too extreme for a company that is increasing its lead in a growth market… Recession or not, Intel's a deal."

Contrarian Takeaway:

First, on a fundamental front, Intel's latest stab at earnings didn't go terribly well. The company missed Wall Street's expectations for the fourth quarter and issued disappointing guidance for the first quarter. The subsequent response was one of disdain, and took Intel into new-low territory for the year.

The stock is continuing to flounder around new-low territory, and is being thwarted to the upside by its ten- and 20-day moving averages. Additionally, Intel shares recently breached—and remain below—their 160-week moving average.

Optimism such as that revealed in this article is the very thing that can spur dramatic sell-offs. The expectations bar becomes set too high, earnings or other news disappoints, and a panicked bout of selling ensues.

The press isn't the only source of optimism on Intel. According to Zacks, there are still 13 Strong Buy ratings, two Buys and ten Holds [on the stock], leaving plenty of room for downgrades on any future earnings misses (or continued lackluster price action in the shares). A cheap stock can always get cheaper, and without a wall of worry to scale, Intel could have farther to fall. (It closed below $21 Thursday—Editor.)

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