Short Intel (INTC) trade idea

Intel (INTC) report earnings after market tomorrow (15 January) and this could be an interesting name to look at from the short side.

Source: Bloomberg

Short Intel (INTC) trade idea: Short sell Intel (INTC) at $36.60 (or at market), stop loss $38.00, targeting $34.25.

Technically, the tech giant is tracking sideways (if we take a simple look at the 20-day moving average), which aren’t the best conditions to short stocks (I prefer to follow a downtrend). However, this gives me a fairly clear area where I can place a stop loss on the short idea.

With the December high of $37.90 in focus, I would look to exit the short on a close above this level, potentially even reversing the trade into long trades and taking advantage of the bullish break.

The candles on the daily chart highlight good selling coming into the market on rallies and I feel the bears are simply waiting for tomorrow’s earnings report to give them the fundamental fodder to increase short trades.

Good support is seen at $35.33 to $35.26, which are the December and January double bottoms. A break here would be a clear positive for my idea. I would look to target a move to the 20 November low of $34.00 on a subsequent break.

Bear in mind that short interest in this low at 5% of the float, which is what you would expect when the stock is 3.5% from its recent high. This supports the idea that Intel will need to hit the market with a strong result.

INTC has a history of volatility on earnings day, with the average move over the last eight quarters standing at 3.3%. Recall Intel fell 2.7% in October, whereas the stock rallied 9.3% in July, so there is good reason to feel that volatility could be prevalent again.

In terms of absolute numbers, the consensus from sell-side analysts is that Intel will earn 68c on revenue of $14.71 billion. Gross margins should fall modestly to 63.98%. However, as always, it’s the commentary that will be the catalyst for traders and investors alike.

The bears will say that Intel did have a good 2014, assisted by better PC units and lower PC costs, but outside of these areas progress in its transformation has been slow. There is a belief that unit growth will now decelerate and gross margins could decline over the medium term towards 60%.

Goldman Sachs, for example, forecast 5% downside to consensus earnings per share for 2015 and has a price target of $22! Valuation-wise, Intel trades on 19 times enterprise value to free cash flow, relative to the median valuation in the semi-conductor of 16 times, so it could be argued that it is expensive.

With an elevated valuation, Intel will need to come out with something fairly inspirational to please the bulls. However, if this does materialise, my stop loss should limit the loss.

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