The recent rally in Intel Corp. may signal weakness for other semiconductor stocks.
Shares of the Santa Clara, California-based company are up almost 17 percent since June 12, the same day Intel raised its forecast for second-quarter revenue on a pick-up in demand. Meanwhile, the Philadelphia Semiconductor Index has fallen 3.5 percent during the same period -- and there could be further declines ahead.
Traders increasingly have transferred money into Intel from other chipmakers in recent months -- “taking from Peter to pay Paul,” said Jim Stellakis, founder and director of research at Technical Alpha Inc. in Greenwich, Connecticut. This underscores why Intel’s peers have become less attractive, particularly amid a period of seasonal weakness, he said.
The Philadelphia index -- comprising Intel, Micron Technology Inc., Texas Instruments Inc. and 27 other companies - - has fallen about 5.7 percent since June 30; the Standard & Poor’s 500 Index is down 2.6 percent. On a trailing 10-year basis, the semiconductor group has lagged behind the benchmark index by an average of 1.6 percentage points in July and almost 1.5 percentage points in August, data compiled by Bloomberg show.
Since 1995, shares of Intel, the world’s largest semiconductor maker, have outpaced this index for at least eight months on six occasions, all of which coincided with periods when the group trailed the S&P 500, according to analysis conducted by Stellakis.
“If history is any guide, semiconductor bulls should keep an eye on Intel,” he said.
Global information-technology spending will grow 2.1 percent to $3.7 trillion this year, down from a March estimate of 3.2 percent, industry research Gartner Inc. said June 23. Such expenditures were flat in 2013 compared with 2012.
“When Intel is doing well, it fundamentally crowds out” some of its smaller competitors, spurring inflows into this tech giant, said Andrew Burkly, head of institutional portfolio strategy at Oppenheimer & Co. in New York.
Intel’s stock has been buoyed because it’s very liquid and a large-cap benchmark for many portfolios, he said. Intel also made one of the most significant upward revisions in five years to its earnings forecast when it reported quarterly results on July 15, Burkly said. Fiscal 2014 sales will grow about 5 percent to $55.3 billion from $52.7 billion last year, the company announced.
Analysts have, in turn, raised their earnings estimates, indicating the breadth of sentiment is “broadly improving and has high conviction behind it,” he said, adding this is one reason why he likes the stock.
The opposite is true of Xilinx Inc. and Maxim Integrated Products Inc. Investors punished these Philadelphia index members after their earnings forecasts failed to meet rising expectations, Burkly said. Shares of San Jose, California-based Xilinx tumbled 14 percent on July 23, the day after it cut its estimate for fiscal second-quarter sales. Maxim, also in San Jose, fell almost 11 percent July 25, the day after trimming its sales and earnings estimates for the fiscal first quarter.
Investors are favoring large-cap names, such as Intel, because smaller companies usually have a “close relationship with certain end-buyers, which translates to idiosyncratic risk,” said David Mazza, head of research for SPDR ETFs and SSgA funds in Boston at State Street Corp. In addition, Intel’s stock is playing catch-up now, after lagging behind the broader group by 57 percentage points from June 2012 until March 2014.
Longer-term, the bull case for semiconductor stocks is reinforced with the Philadelphia index trading to a three-year relative high on July 16, after bucking seasonal weakness the prior month. Between 2004 and 2013, the semiconductor group trailed the S&P 500 by an average of 1.5 percentage points in June, though it outpaced the benchmark by almost 4.1 percentage points this past June.
There’s a “revolutionary period” under way in this industry as the need for semiconductors continues to spread beyond computers into automobiles and other industrial devices, so investors might “reset their expectations,” Mazza said.
Recent bullishness could be a bet on the prospect of more durable earnings to come, especially because these stocks aren’t very expensive, he added, noting that the Philadelphia index is trading at a price-to-sales multiple of about 2.4, compared with 1.8 for the S&P 500.
Amid the stock market’s summertime choppiness, semiconductors are “ripe for a pullback” in the short-term, though such a decline probably will be less for Intel than its peers, Burkly said. That’s because the company’s beta is one of the lowest for this group, which could help attract additional investment, he said. A stock with a low beta tends to rise or fall less than the broader market.
With shares of Intel trading to a 12-year high on July 22, Stellakis sees the potential for more losses ahead for the semiconductor index, he said.
The relationship between Intel’s performance and the broader group has “stood the test of time,” even when the company’s stock has fallen behind its peers, Stellakis said. In five of the six times this has happened since 1995, the Philadelphia index has outpaced the S&P 500, according to his analysis, so Intel’s recent 12-year high “could be a bad omen for other chipmakers.”