Tech stocks have taken a beating on Wall Street during the past week, but those fortunes may be about to change as earnings season heats up. In fact, with strong earnings reports expected out of bellwethers Intel (INTC) and SanDisk (SNDK), the recent weakness in tech stocks may be a boon for savvy investors.
Today, we’ll take a closer look at Wall Street’s expectations and how to trade SanDisk and Intel stock ahead of earnings:
Semiconductor giant Intel has lost a step or two from when its Pentium processors ruled the desktop market. The company’s chips are still well-respected — INTC holds the No. 1 spot in the semiconductor industry at 15.4% market share — but demand for PCs and laptops has fallen quickly, replaced by growing consumer demand for mobile products like smartphones and tablets.
However, reports from IDC and Gartner suggest that the PC market is stabilizing, indicating that Intel earnings might surprise Wall Street when they’re reported at the close of trading on Tuesday, April 15.
For the record, the consensus is forecasting a profit of 37 cents per share of Intel stock, though EarningsWhisper.com indicates that the whisper number arrives a penny higher at 38 cents per share. Overall, expectations in the brokerage community are extremely muted, with Thomson/First Call reporting that only 14 of the 43 analysts covering INTC rate it a “buy.” What’s more, the consensus 12-month price target of $26 represents a discount to current prices around $26.50 — and this after several sessions of heavy selling pressure.
Options traders, meanwhile, have a rosier outlook for INTC stock — at least over the short term.
Specifically, INTC has attracted roughly 420,000 calls in the April/March series of options, compared to 326,000 puts. The result is a relatively neutral put/call open interest ratio of 0.78 for the front two months of options. (In other words, options traders are nearly divided on Intel stock’s prospects.)
Peak call open interest for INTC’s April/May series resides at the in-the-money April 18 $26 strike, with more than 86,000 contracts in residence. Following at a close second is the out-of-the-money April 18 $27 strike, which sports call open interest of 79,000 contracts. Peak put open interest, meanwhile totals about 76,000 contracts at the April 18 $26 strike.
Click to Enlarge Taking a closer look, we find that weekly April 18 implieds are pricing in a potential post earnings move of about 4.1% for Intel stock. This places the upper bound for a potential post-earnings move at $27.61, while the lower bound lies at $25.39. A rally to this upper limit would place INTC above resistance at $27 and within striking distance of fresh 52-week highs.
While the PC market has been tough, there are signs of a rebound. What’s more, Intel has been making inroads into mobile and cloud computing. As such, while first-quarter figures will likely arrive in line with expectations, Intel earnings guidance could surprise quite a few analysts and investors.
Options Trade for Intel Stock: Bull Call Spreads
Thus, traders looking to position themselves ahead of next week’s report might want to consider a May $26/$27.50 bull call spread.
At the close of trading on Thursday, this spread was offered at 65 cents, or $65 per pair of contracts. Breakeven lies at $26.65, while a maximum profit of 85 cents, or $85 per pair of contracts, is possible if Intel stock closes at or above $27.50 when May options expire.