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Intel May Not Bounce Back Any Time
Soon
By Brett D. Fromson
Chief Markets Writer
9/26/00 7:40 PM ET
This is a stock market without conviction, one in which it does not pay to be a
zealot one way or the other. Today's brilliant highflier may well be next month's
flameout. Conversely, yesterday's loser is tomorrow's winner.
There are, however, some exceptions to this rule. Semiconductor maker Intel
(INTC:Nasdaq - news - boards) is one. The stock crashed and burned last week
after announcing Thursday that it will miss third-quarter earnings and revenue
estimates. My colleague Jim Seymour has argued that Intel will be back soon.
I Think I Can, I Think I -- Doh!
Intel tumbles after third-quarter warning
I respectfully disagree. I doubt the stock is going to do well for several months to
come. (Some may feel that time horizon is too short a period to judge a stock. On
the contrary, I'd say that when you own high-growth, high price-to-earnings stocks
like Intel, you must pay attention to the short run. They are extremely volatile. Even
more importantly, if you buy these companies at fancy prices, you have very little
margin of safety when they blow a tire. Talk to some of those poor folks who
bought north of $61 a share this summer.)
Let me explain my kicking Intel when it's down.
First, look at how the stock reacted to the bad news Thursday evening. The stock
sank Friday, of course. More telling, though, is that, while the retail investor was
coming in to buy the dip, the largest, most sophisticated investment firms were
selling.
Fidelity Investments put the word out from the get-go that it had Intel "for sale,"
according to traders who deal with the mutual fund giant. These traders understand
that when Fidelity says it has a stock for sale, they are obliged to bid if they want
to do any further business with the firm. So they did, and Fido hit the bids between
$46-$48, selling millions of shares of Intel. (My sources estimate that Fidelity could
easily have sold 10-15 million shares.) That was an unwise move on Friday
because the stock rallied a bit on the day. But now, a few days later, those sales
by Fido don't look so stupid, with Intel at $43 to $44 a share. (And by the way,
those Wall Street firms were not loading up on Intel; mainly they were selling it to
retail customers, according to the traders.)
What worries me even more than Fidelity's selling last Friday, however, is that it
probably still holds an enormous amount of stock even after these sales. (As of
June 30, Fido was Intel's largest shareholder -- owning 209 million shares.) I have
to think that Fidelity will continue to lighten up unless Intel has spectacularly good
news to announce soon. Theoretically, that could happen. But do you want to hold
the stock on that chance? Fido fund managers are not in the habit of holding
stocks that have lost momentum because the business fundamentals have
deteriorated. That suggests more selling pressure from the big boys.
Second, growth stocks like Intel sell off when investors no longer believe the
fast-growth story. As independent technology analyst Roxane Googin of the High
Technology Observer has written: "They move from 'must-have' growth stories, to
asset plays. The difference in valuation can be astonishing in these situations."
Googin was referring to Microsoft (MSFT:Nasdaq - news - boards) when she wrote
this. I would argue that her observations apply to Intel as well. (And Intel is still not
cheap enough to attract the value-investing crowd; they probably will not be
interested until Intel's PE is cut in half.)
A third worry of mine is that Intel insiders have been consistent sellers, in the past
six months, of nearly 1.5 million shares. Not one insider bought. Now, I do not have
data going back further, so I can't say whether such selling is the norm. But in any
event, insider selling is never a vote of confidence by the managers of a company. If
Intel's prospects were truly bright, someone in management would buy the stock,
even if he or she already had stock options out the wazoo. You have to think that
some insiders must have loaded up back in the 1990s when Intel traded at between
eight and 10 times earnings and its market dominance was just emerging. The fact
that insiders are sellers when revenue growth is slowing and the price-to-earnings
ratio is 36 should tell investors something.
Another reason to think Intel is dead money is that Wall Street hates the stock.
(The big joke is that a week ago, the sell-side analysts mostly loved it. But that's
another column.) The analysts have slightly different takes on why they don't like
Intel, but they have all downgraded the stock or lowered their price targets just the
same. "We think some caution is warranted even with the stock at lower levels,"
wrote analysts at Merrill Lynch last Friday.
Most analysts say that the troubles are specific to Intel. They tout in its stead
rivals Advanced Micro Devices (AMD:NYSE - news - boards) or Micron
Technology (MU:NYSE - news - boards). (AMD and Micron are both down in the
wake of Intel's preannouncement, by the way.) When you see the herd running
away from a stock like Intel, don't look for them to come running back any time
soon. To my knowledge, no sell-side analyst has ever been fired for sticking with
the crowd.
My final reason for thinking that Intel is not getting off the floor anytime soon? Our
readers tell me so in email after email. I have to respect that. They are saying that
Intel lost its momentum months ago, that the game has moved onto new and faster
growing names. I may have my doubts about the momentum game, but I have no
doubt that the readers are right that Intel has, for the foreseeable future, ceased to
be a beneficiary of that game.
Finally, from the Department of Clarification:
In my column last Thursday about the meaning of Intel's bad earnings and revenue
announcement, I may have confused readers. The column was an attempt to gauge
the possible downside risk in the Nasdaq after Intel announced.
I wrote: "In my column Wednesday I estimated that the S&P 500 was easily
capable of dropping 10% or more. The Nasdaq Composite is an even more volatile
index, so you should expect that it could fall even more than the S&P before
bottoming and then rallying." Some readers thought I was predicting the composite
to fall more than 10% last Friday, according to emails I received.
That was not my intent. I was simply taking Wednesday's analysis of the S&P and
applying it to the Nasdaq, post-Intel announcement. In Wednesday's column, I had
written, "Let's do a thought experiment to estimate how far down the [slowing]
economy might take the market. So this quick and dirty analysis implies a
10%-11% drop in the market. It ain't a nightmare, but it's less."
So when I wrote Thursday night that you could expect the Nasdaq to fall even more
than the S&P before bottoming and rallying, I did not mean to suggest that the
Comp was going to do that on Friday. I did mean to say, however, that the market
could potentially go down 10-20% from last Thursday's close over the next several
months.
Hope this clears things up. |
