Intel (INTC): The Smartest Guys in the Room Want to be Contrarian

by Dan May 19, 2011 9:35 am • Commentary

Goldman Sachs downgraded INTC this morning from a Neutral to a Sell Rating based on the following: 

We believe four supply chain indicators point to an increase in cyclical risk
which could also point to an increase volatility for shares:
1. Semi equipment orders declined in each of the past two quarters after
peaking at higher levels than in the last cycle;
2. PC shipments declined more than processor shipments last Q and
our analysts expect processor shipments to slow to correct for 1Q excess.
In each of the three times an imbalance of this size occurred INTC shares
have declined and underperformed the S&P 500 over the subsequent three
months: avg decline 18%; avg under-performance vs SPX 7%.
3. Inventories at notebook customers rose 12-50% qoq as Intel pushed
processors into the channel;
4. Dramatic manufacturing capacity increases in 2010-2012 are likely to
pressure prices due to oversupply and will pressure INTC margins due to
increased depreciation and overhead costs.

INTC which doesn’t give mid quarter updates anymore, has been known to pre-announce qtrs as they did in late August 2010 and in lat Jan 2011…..GS notes that INTC’s own pre-announcement potential and scheduled mid quarter updates by competetor TXN and customers like NVLS could serve as catalysts over the next few months.

Chart below shows the last 2 times that INTC has gotten to the $24 level the stock has sold off significantly over the next few months…..

[caption id="attachment_1988" align="aligncenter" width="300" caption="2 Yr Intc Chart provided by Bloomberg"][/caption]

Goldman’s derivative analysts suggested buying OCT Put Spreads to take advantage of their fundamental analyst’s view…..


INTC 6 month implied volatility of 26% appears low vs its own history and
low relative to the SMH and XLK over the past 10 years. 1-month realized
vol stands at 31%, having risen from 11% in January. While our analyst has
high confidence in INTC downside, timing is difficult to pinpoint. We favor
hedging now because risks are high, but recommend buying put spreads
rather than puts to limit time decay. We recommend Oct $19/$23 put
spreads for $0.97. Put spread buyers risk losing their net premium paid.

MY VIEW: I think there is a good chance that the slowing pace of the economic recovery and the the end of QE2 will cause greater volatility over the course of the summer and there is a good chance that we retest the March lows….companies like INTC and their recently upwardly revised guidance are not predicated on that belief…..

I want to look to August expiry and isolate INTC’s q2 reporting date that is scheduled for July 20….COUPLE TRADES I AM CONSIDERING:

TRADE 1: INTC (23.32)  BUY the Aug 22 / 20 Put Spread for .45

-Buy Aug 22 Put for .75

-Sell Aug 20 Put at .30

Break-Even On Aug Expiration:

Stock bwtn 21.55 and 22 lose up to .45….stock above 22 lose all .45, stock btwn 21.55 and 20 make up to 1.55 and stock below 20 make full 1.55 or ~6.5%.


TRADE 2: INTC (23.32)  BUY the Aug 22 / 20 / 18 Put Fly for  .26

-Buy Aug 22 Put for .74

-Sell 2 Aug 20 Put at .60 (.30 each)

-Buy 1 Aug 18 Put for .12

Break-Even On Aug Expiration:

Upside: stock btwn 22 and 21.74 lose up to .26, stock above 22 lose all .26

Downside: stock btwn 21.74 and 20 make up to 1.74, best case stock at 20 ans make full 1.74…..stock btwn 20 and 18 payout trails off……Stock 18 or lower lose .26