I am a fan of Intel (NASDAQ:INTC), but its stock is severely lagging the sector. Year to date, INTC is in negative territory while the VanEck Vectors Semiconductor ETF (NYSEARCA:SMH) is up about 21%. So a few weeks ago I wrote about putting the stock in the penalty box, which was the right thing to do at the time — it has fallen another 15% since then.
Clearly the stock is broken, but since the company isn’t yet, it’s an opportunity to consider a long position in INTC stock. It is time to get Intel stock out of the penalty box and back in play.
There rarely are perfect entry points into stocks, and since this is a long-term bet on the recovery of this stock, I am not concerned to find the absolute bottom. So those who buy the stock now should be ready to see periods of more red.
This is especially true since we literally just saw markets take a tumble this morning on geopolitical headlines. Last week, the trade talks between the U.S. and China broke down and stocks are suffering from the mess. This morning, again, markets are under selling pressure, and this takes most stocks down — the good with the bad.
It is important to note that initiating any bullish positions in stocks now assumes that this economic war will abate soon. So the size of the position matters, and it is prudent to break orders up in tranches. This leaves room for adding more at lower prices if the macroeconomic malaise persists.
Intel Stock Needs to Straighten Out
Intel is a survivor of the Dotcom bubble, so clearly they are proven winners in the long term. But here, it is still not a conviction buy from the fundamental stand point because I am still if disappointed with their management.
They are making too many bungles and they look like amateurs. Compared them to Advanced Micro Devices (NASDAQ:AMD), for example, which has the vote of confidence from experts. Also, recently Intel announced it is leaving the 5-G market, just when the rest of the world is starting to embrace it. This is heralded as the next big thing in communications yet Intel already gave up on it. Management cited the deal between Apple (NASDAQ:AAPL) and Qualcomm (NASDAQ:QCOM) as the reason for their departure from the field.
Nevertheless, today’s trade is tactical and has a hybrid thesis of fundamentals and technicals. INTC is cheap at a 10x trailing price-to-earnings ratio, so there is value below, which means that there is little froth left in the stock. This is the upside result of a 24% drop in two weeks. Meaning, the bears will need incremental bad news to inflict similar pain from here.
Also technically the two recent falls were too fast, leaving too many open gaps above. Unless the company is on its last leg forever, the market action will eventually fill those gaps. INTC and Xilinx (NASDAQ:XLNX) fell on specific problems in their reports. On the other hand, the SMH ETF and AMD aren’t seeing the same negativity. And therein lies the bounce opportunity as the laggards will eventually fall in line with the sector.
The bottom line is that Intel stock has value below, so it is will stabilize soon. So there is an upside opportunity after this severe correction which actually qualifies as a recession per Wall Street terms. There will be resistance lines at $47, $48.40, $50.50 and $53 per share.
On the downside, the bulls need to defend $44 per share area, or else they could trigger a bearish technical pattern to target $40 per share. While this is not a forecast, it is one of the current scenario. Furthermore, It will need the help of the equity market in general. After all we are still expecting the next shoes to drop from China’s retaliation to the U.S. tariffs. So if the markets continue falling then INTC stock will not find its footing yet.
But overall, my thesis is that investors will shrug off this tizzy and we will resume higher. And eventually there will be an upside in Intel that will start a healthy rebound rally.
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.