It's often tempting to buy a well-known stock after a sharp decline, but it can also be dangerous. Stocks that are in a downtrend often remain lackluster or go down even further. Numerous tech stocks have been hit hard in recent weeks and months, but in many cases it has not paid off to buy even though there appeared to be value.
Tech stocks with strong exposure to the PC sector have been trending down and in many cases have declined to levels that many investors did not see coming. Just look at names like Hewlett Packard (NYSE:HPQ), Dell (DELL) and Advanced Micro Devices (NYSE:AMD). At many levels on the way down, it was easy to make a fundamental case for buying the stock, but that has not worked for many investors as these stocks remain near 52-week lows. There are a few reasons why Intel (NASDAQ:INTC) shares might also have further downside, and because of that it might be too early to buy. Here are a few points to consider:
1. Intel has some company-specific issues which could continue to put pressure on the stock. This includes the fact that CEO Paul Otellini recently announced that he plans to resign around May 2013. Many investors feel that Intel has lost its edge in some areas that are vital for future growth such as mobile devices. Other competitors are doing well with specialized chips for tablets and smart phones and those companies are seeing solid growth rates. Another issue is that Intel has relatively high inventory levels and with sluggish PC sales, that could drag the stock down.
2. Intel is also facing macro-economic and PC-industry challenges. The European debt crisis has pushed unemployment to record levels in countries like Spain, France and Portugal and there does not appear to be a quick-fix. China and the U.S. economy also have downside risks, especially if an agreement on the fiscal cliff is not found. This comes at a time when PC sales are going down, and profit margins continue to be squeezed. Investors expected the PC sector to get a big boost when Microsoft (NASDAQ:MSFT) launched "Windows 8" but demand appears lackluster and recent data points show it could be worse than expected. A recent ZDnet article summarizes the decline and it states:
"....research firm NPD said that in the first four three weeks (and one day) following the launch of Windows 8 ending November 17, sales of Microsoft-powered PCs fell 21 percent from a year earlier. Desktop PC sales are down by nine percent, while notebook sales down by 24 percent."
3. Wall Street analysts seem to be getting more bearish on the PC sector and Intel in particular. Analysts at Stern Agee just cut their price target for Intel shares to $18. That means that even though the stock has already declined quite a bit, it could have more downside potential. Other analysts are also bearish. Goldman Sachs recently reiterated a sell rating for Intel.
It seems that PC sales forecasts for the first quarter might be too optimistic. If so, it could lead to some warnings on earnings in the coming weeks from PC companies. That would probably be a better buying opportunity for longer-term investors. Intel shares have seen a sharp decline but it still trades at about 10 times earnings estimates while truly battered tech stocks like Hewlett Packard now trade for about 4 times earnings. That means there could be more downside for Intel and there seems to be little in terms of a catalyst to send the stock price higher. That's why investors should wait for a lower share price before considering a buy.
Key Data Points For Intel From Yahoo Finance:
Current Share Price: $19.58
52-Week Range: $19.23 to $29.27
Dividend: 90 cents per share which yields 4.6%
2012 Earnings Estimate: $2.11 per share
2013 Earnings Estimate: $1.96 per share
P/E Ratio: about 10 times earnings
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
Disclosure: I am long HPQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.