INTC: Not All Semiconductors Stocks Were Created Equal in 2011: Shorting ‘Best Of Breed”

by Dan December 5, 2011 2:18 pm • Commentary

Semiconductor stocks have been one of the most divergent groups within the Technology stock universe this year.  The SOX is down about 31% ytd, while the Nasdaq is basically flat on the year.  There is also a significant divergence within the SOX where stocks like INTC ( ~9.5% of the index) is up almost 20% ytd, while stocks like BRCM are down about 30% ytd with a weighting of about 6.5% of the index. In fact out of the top 10 stocks in the index that make up about 57% of the Index of 30 stocks, only 4 are up in any meaningful manner.

The chart below shows the haves and the have nots within the SOX, INTC one of the few stocks up more than 5% in the entire index, while once high flier BRCM is down close to 30%.

SOX vs INTC vs BRCM 1 yr chart from Bloomberg


I think something has to give in INTC and feel that there is a decent chance due to weakness in Europe and a slowing economy in China that INTC may need to back off on their Q1 guidance as Q45 might have been a tad worse than they gave guidance in mid Oct.  INTC has confirmed its Q4 reporting date for Jan 19th which falls in Jan expiration, but I think there is a decent chance they could actually pre-announce negatively if December proves to fall flat for orders, something the disruption in Europe could clearly cause.  Up until a couple years ago INTC used to hold mid quarter updates this week of the quarter, they don’t anymore, but any disappointment out of TXN”s mid qtr update this Thursday afternoon could cause some weakness across the space. So here’s the trade:

TRADE: INTC ($25.05) Bought the Jan12 24/22.5 Put Spread for .35

-Bought 1 Jan12 24 Put for .65

-Sold 1 Jan12 22.5 Put at .30

Break-Even on Jan12 Expiration:

-Profits btwn 23.65 and 22.50 make up to 1.15 (or a little more 3x your money),  22.5 or below make full .35

-Losses bwtn 23.54 and 24 lose up to .35, and above 24.00 lose all .35 or ~1.5% of the underlying.

Technically the stock is trading at levels not seen since before the start of the financial crisis and I am not sure that even its earnings multiple of 10x can support the expected 5% sales and earnings growth next year.

The stock has tried now on 3 occasions of late to get through the $25 level and on the last 2 the stock was met with sell offs of 5 and 10% respectively.  I don’t believe INTC can continue to hold the inevitable collapse of the SOX.

3 YR INTC chart from Bloomberg