The softening outlook for semiconductors hit all technology stocks late in 2018, including chip-giant Intel (ticker: INTC). Now trading at 10 times next year’s estimated earnings, Intel stock illustrates a current market quandary. How cheap is cheap enough? As the year comes to a close, we’re taking a look at all 30 stocks in the Dow Jones Industrial Average, starting with the worst performer— Goldman Sachs Group (GS)—and working our way up to the highest-flying stock in the benchmark, Merck (MRK). The rankings will shift over the next couple days, but the stories behind the stocks shouldn’t. For Intel, 2018 was a strong year for demand. Management raised their full-year revenue forecast three times by an aggregate amount of about $6 billion to a total of around $71 billion. Still, Intel stock is flat year to date and is down 19.5% from its 52-week high. Newsletter Sign-upAnalysts have been cooling on Intel shares too, with fewer recommending the stock now than at the start of the year. Only 46% of Wall Street analysts covering the company rate its stock a buy, compared with the average buy-rating ratio of about 56% for the Dow stocks. The company’s 2018 performance doesn’t seem to be the reason for the decline. Intel has outperformed other semiconductor stocks, with the Philadelphia Stock Exchange Semiconductor Index slumping 9.1% year to date. It is the overall macroeconomic outlook that appears to be problematic for Intel and the semiconductor sector. KeyBanc analyst Weston Twigg says there is plenty to worry about: “uncertainty regarding the impact of the trade war, along with relatively weak trends in China, autos, industrials, consumer, white goods, smartphones, PCs, and hyperscale.” All those issues are weighing on investors’ views of semiconductor stocks. Twigg added, “we believe overall semiconductor demand has additional downside risk entering the first half on 2019.” Intel has acknowledged some of those headwinds for 2019 as well. “China’s a dominant market for us,” Intel management stated on their recent quarterly conference call. “As this most recent round of tariffs kind of play out...it’s going to be a wait-and-see as we go into 2019.” But, management also reiterated some of the long-term tailwinds benefiting their business, as the company plays “a bigger and bigger role in the increased needs for data.” Intel’s chip sales to cloud computing providers rose 50% in the third quarter. Intel will next speak with analysts and investors in January at the 2019 Consumer Electronics Show in Las Vegas. Then the company will give its 2019 outlook on its fourth-quarter conference call later next month. At these events, investors could have their worse fears confirmed—that business trends have indeed softened. But some worries appear to be built into the stock price already. Intel’s current price-to-earnings ratio is close to the lowest levels experienced over the past decade and about a 20% discount to Intel’s average. The recent stock market selloff seems to indicate a recession, or something worse, is just over the horizon. However, if trade conflicts are resolved quickly and if economic growth continues in 2019, then investors may want to keep Intel and other cyclical stocks on their radar. And even if 2019 is soft, Intel’s valuation and its leverage to the dominant technology trends of cloud computing, autonomous driving, and augmented reality could make next year a good time to add some Intel stock to portfolios with a longer-term focus. Write to Al Root at [email protected]
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