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Intel Stock Belongs In the Penalty Box … For Now

Nicolas Chahine

Intel (NASDAQ:INTC) reported earnings last night and Wall Street hated what they saw, sending Intel stock fell down 8% on the headline.

Intel Stock Rally Isn't Over: Here's Why Prices Above $50 Make Sense

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This reaction resembles that of Xilinx (NASDAQ:XLNX), which collapsed 16% on its earnings headline. They both came into the events with lofty expectations.

The actual metrics were not a disaster for INTC as they met or barely beat most expectations. Except that they committed the cardinal sin and guided much lower going forward. Traders are consistent in selling any headline that reduces future results, regardless of the quality of the current report card.

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It doesn’t help that INTC’s CEO cited a dramatic slowdown in China. These are comments to scare an entire sector, but I think in this case, it’s probably more INTC’s specific issues than system-wide problems.

To add to the confusion, INTC management said they are expecting better conditions in the second half. This is in direct conflict with them lowering guidance. So maybe they are managing expectations lower so they can have an easy beat next quarter. This is the UPOD tactic, where they under promise and over deliver.

Even if that were true, it would be difficult for them to have a turnaround this year. It would require a very steep reverse ramp and, to me, that requires far too much hopium to make Intel stock worth a gamble.

I also question the logic behind INTC exiting the race for 5G before it even starts. Management cited that they did so because of the deal between Apple (NASDAQ:AAPL) and Qualcomm (NASDAQ:QCOM).

This by itself is not a reason to short Intel stock, but it is a sure sign that they need to regroup to find the next hot venue to come. Until then, I’d classify the stock as a trading vehicle and not a place to park money for the long term. For that, there are better companies.

For example, I’d rather bet on a proven winner like Advanced Micro Devices (NASDAQ:AMD), who actually had a huge up year in 2018 when the whole market struggled. If INTC stock rallies then so will AMD. Or sit it out for a few days until the dust settles. In fact, this morning, AMD is holding best in its sector on the INTC dip.

There is value in Intel stock as it sells at a modest price-to-earnings ratio of 13. This is cheap in absolute terms and especially cheap compared to AMD’s P/E of 85. But INTC historically lags in value. So in a sense, it’s expensive against itself. This would make buying it now a potential value trap. Besides, the stock just came off a two-decade high.

What to Expect From Intel Stock Now

Meanwhile, there are important levels below its current levels. INTC stock is falling into its first area of support which has been in contention since January 2018.

In February, INTC stock broke out in force from $52 per share. It has since served as support at least once and it should do it again. For the bears to break through it they would need the help of a falling market in general. If it fails, there is another pivotal level around $48 per share, which will also provide even stronger support.

The good news is that this area is very magnetic. So if I am already long INTC stock, I can hold it to see how the price action unfolds over the next few days.

But a candle this big is not usually a one-day event so it deserves respect … it’s not a great starting point to catch the falling knife on the first tick down.

Furthermore the whole sector is under fire from the experts in the media. Their rhetoric has been particularly negative, especially after the hideous reaction to the earnings report from Xilinx (NASDAQ:XLNX).

And there is risk from the whole market being near all-time highs. Most bulls will have one foot out the door, so in essence, the market is in weak hands for a few days.

In summary, Intel is a decent company but it needs to give investors better reasons to get excited. For now, there are better bets in the sector.

Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.

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