Get Ready for the Intel-Fueled Trade

Five or ten years ago, most companies were considerate enough to alert investors to a quarterly shortfall weeks before the actual conference call took place. These days, the “pre-announcement season” has largely vanished and investors remain in the dark, right up until the moment that actual quarterly results are released.

Well, one company makes an exception. Chip maker Intel (Nasdaq: INTC) is kind enough to provide an update on the quarter as soon as any deviation from guidance emerges. At some point during the final weeks of the quarter, Intel can be expected to tweak guidance — and it often has a major impact on the entire chip sector.

Well, for active traders, we may soon get an intriguing set-up.

A matter of when, not if.

We don’t really need to speculate about whether Intel will pre-announce a weak quarter. In fact, its’ overwhelmingly likely. In recent weeks, both Dell (Nasdaq: DELL) and Hewlett-Packard (NYSE: HPQ) have noted a sharp slump in PC sales, many of which have “Intel Inside.” Some attribute the slump in PC demand to the ongoing juggernaut of tablet computers like the iPad, while others think it’s simply a pause before the imminent release of Microsoft’s (Nasdaq: MSFT) new Windows operating system.

Yet here’s the curious thing. One month ago, the consensus EPS forecast for Intel for the quarter ended September was $0.61, according to Yahoo Finance. Since then, Dell and HP have sharply lowered their numbers, and yet the Intel number has dropped just a penny to $0.60. The odds of Intel actually meeting that number are almost nil.

As a result, it’s only a matter of time before Intel comes out and says that quarterly profits will be $0.55 a share (or $0.50 or even $0.45). For that matter, the current consensus EPS estimate of $0.72 a share for the fourth quarter — which hasn’t budged in the past 30 days – now looks like an impossible target. PC makers such as Dell and HP, seeing a sudden drop in sales, are likely sitting on a rising tide of unused chips. And that pile of inventory needs to be whittled down, likely leading to disappointing order rates for Intel in the near-term.

The Trade…

Intel is a bellwether. Sharp moves in its stock tend to influence the price action of many other chip makers and chip equipment suppliers. Yet that can create opportunity. If some of these chip stocks, at least the ones that have little exposure to PCs, take a hit, then you need to pounce. It will only be a matter of time before analysts come and defend these stocks, and investors bid them right back up.

Here’s a short list of chip stocks that could take an Intel-related hit but actually have little exposure to PCs.

*   Cirrus Logic (Nasdaq: CRUS). This stock has been on fire, thanks largely to its growing role as a supplier of audio chips to Apple (Nasdaq: AAPL). Shares are currently trading at $42, which is no bargain, but watch this name for a pullback.

*   Analog Devices (NYSE: ADI).  This company makes a wide range of chips that go into cars, consumer electronics and a wide range of industrial devices. Here again, watch for a pullback, which would have nothing to do with the health of its core business.

*   On Semiconductor (Nasdaq: ONNN).  A decision to buy Sanyo’s chip division has led to acquisition indigestion and disappointing quarterly results. Yet management appears to be getting operations on track, which helps explain why shares moved towards the $10 mark in the first quarter of 2012. Now, shares are back below $6.50, perhaps on concerns that tech spending will slow. Yet that tech weakness appears confined to PCS — an area that does not involve On Semiconductor. But this bay may get thrown out with the bathwater anyway when Intel pre-announces
 
There are actually a number of chip plays that have little to do with PCs. So watch this group when Intel delivers the bad news. If you can find the names that have scant exposure to PCs but sold off nonetheless, then you’re likely looking at a bounce back candidate.