For some reason Intel Corporation (NASDAQ:INTC) seems to be boring to Wall Street. Some 40 investment banks follow the company and provide research on INTC stock. They seem to believe that it is fairly valued as the average target price is close to current levels and there’s broad agreement that shares are a hold, according to MarketWatch.com.
Still, if an enormous market-leading company like INTC is only getting hold recommendations, shareholders should be concerned. This could be a situation where a buy rating means hold, a hold rating means sell, and sell rating means run for the hills.
Analyst Affiliation Bias
To understand why this might be the case, it’s important to understand what is known as “analyst affiliation bias.” This is when analysts overestimate the investment potential of companies that their firms do business with. Some say this problem isn’t as bad as it used to be. Maybe they’re right, but I can assure you that it is still widespread.
Investment banks or brokers are the firms that place buy, sell, or hold recommendations on companies. They research these companies and give their clients who manage money, like mutual funds and hedge funds, investment recommendations. If these clients get value from these recommendations or other research, they will place trades with the bank or broker. The firms that provide the research will benefit because they will be paid commissions to execute the trades.
But here is the issue: These banks and brokers make most of their money from their investment banking services, not by providing research. Investment banking clients include large corporations. These corporations use the bank for services such as daily financing, issuing bonds or shares, or help with acquisitions.
Because of this analysts are sometimes reluctant to say negative things about a company that is or could become a banking client. For example, say an analyst ‘Joe’ works at investment bank ABC. ABC makes millions of dollars annually by providing services to corporation XYZ. Now suppose that Joe notices something in XYZ’s filing statements that would make him place a sell recommendation on the stock.
However, this isn’t the Boy Scouts and Joe knows that if he publicly expresses his opinions, XYZ may stop doing business with ABC. ABC could lose millions of dollars and will come up with a reason to fire Joe. In the real world, things like this happen all of the time. Joe doesn’t have analyst affiliation bias; He has “Joe doesn’t want to get fired” bias!
INTC Stock’s Broad Hold Rating
There is an extreme, and many would say dishonest, reluctance for these investment banks to say negative things about a corporation. A study by market data provider Factset that came out in early 2017 showed that only about 5% of companies actually have sell recommendations on them. It is reasonable to think that this shows extreme bias because in a neutral market there should be just as many sell ratings as there are buy ratings.
Intel annually pays out tens of millions of dollars in investment banking fees. When behemoth equities like INTC stock are only averaging hold recommendations, I would be concerned if I was a shareholder. It may be a bad signal because these hold recommendations may be overly optimistic. This may be a situation of “if you don’t have anything good to say about a company, don’t say anything at all.”
Bottom Line on INTC Stock
If INTC stock heads lower, look for some short-term support around the $43.50 level. There was support there in May. It was also support during last October and then again in December.
Intel stock is a relatively cheap way to ride the semiconductor wave. The firm trades at just 10.8 times its forward earnings, compared to Advance Micro Devices (NASDAQ:AMD), which trades at 30.9 times its forecast earnings.
Intel is due to report earnings on July 25. Analysts expect the company to post earnings of 89 cents per share for the quarter, which would be a 15% year-over-year decline. Zacks expects earnings for the year of $4.23 per share on revenue of $68.51 billion, which would represent year-over-year declines of 7.64% and 3.3%, respectively.
As of this writing, Mark Putrino did not hold a position in any of the aforementioned securities.
