Those investors bullish long term on Intel (NASDAQ:INTC) may want to wait until after earnings to start a position. The risk/reward equation looks much less favorable with the recent run-up in the stock. In the following sections, I will lay out my case to wait until after earnings prior to starting a position.
A Buy the Rumor, Sell the News set-up?
The "buy the rumor, sell the news" set-up occurs all the time in the markets today. Investors buy up stocks based on what they believe will happen in a given earnings report, economic event or new product release (the rumor). After the event transpires or the report is released (the news), they dump their positions and the stock moves lower. These buy the rumor, sell the news spectacles often apply to things like earnings being announced. It seems Intel's stock may be experiencing this effect as we speak.
(Chart provided by Finviz.com)
What happens is the stock rallies hard into earnings. The rally occurs because investors, emboldened by the rumors that their favorite stock -- Intel, in this case -- is going to hit it out of the park in regard to exceeding earnings estimates, and has new products on the horizon that are a sure thing to be successful and are revolutionary. The buying prior to the earnings announcement runs the stock up significantly, leaving it vulnerable to profit-taking once the actual earnings are reported.
Three possible outcomes
Now, this is only one of three possible scenarios, although it is the most likely outcome. A second occurrence, which has an even more devastating outcome, is the earnings announcement is not impressive and the short-term investors in the stock for a quick buck bail immediately, along with long-term investors who are devastated by the debacle. The third outcome is the earnings and products released are colossal hits out of the ballpark, propelling the stock even higher, the rarest of outcomes.
What happened last quarter?
On 1/16/2014, Intel reported 4th-quarter 2013 earnings of $0.51 per share. This result was in line with the consensus of the 37 analysts following the company, and beat last year's 4th-quarter results by 6.25%. Over the course of the next month, the stock gave back 10%, prior to moving higher.
(Chart provided by CNBC.com)
Intel's stock current action analysis
Let's review Intel's current action and investor activity to determine if Intel may fit into this scenario. First, is Intel's stock running up significant gains into earnings based on positive news hype? In a word, yes. Intel recently touched a new 52-week high just days ago at $2 per share, and has risen almost 10% in the last month, going from $23.50 to $25.56 a share as of today.
(Chart provided by CNBC.com)
The above chart displays the 10% move in Intel's stock leading up to earnings. The "buy the rumor" portion of my thesis is proven. There is no disputing investors are chomping at the bit to get into the stock prior to the announcement. The first part of the premise has already been revealed as true, people are definitely buying on the rumor. All that is left is to see if they sell the news. Hopefully they won't, and current Intel shareholders will be justly rewarded.
Macro-economic & Geopolitical Pressures
The market seems conflicted these days. One day it's up, and the next it's down. The recent flare-up of cold war tensions between the US and Russia has placed many investors on edge. The possibility of further, more biting sanctions being placed on Russia by the US and EU would not be good news for the global recovery. Further, the repercussions that may arise from the Russian response to the sanctions could drive down the stock process on major multinational companies, such as Intel. Not to mention if Russia decides to invade Ukraine outright.
When you invest in a stock, you need to see the forest through the trees. With Intel reporting earnings on Tuesday after the bell, I believe the risk/reward equation for starting a position prior to earnings is now unfavorable. An earnings beat by the company seems telegraphed at this point.
The problem is this may lead to a sell the news situation occurring, even if Intel beats earnings. This is essentially a lose/lose scenario for investors looking to get long the stock prior to earnings. There is no support under current levels. A 6% drop in the stock may occur down to the 50-Day SMA support line in a worst-case scenario. Moreover, the drumbeat of bullish comments from analysts on Intel seems to have picked up substantially in recent days, as evidenced by a plethora of bullish articles recently published. This may indicate any good news may be fully priced in at current levels.
The Bottom Line
Look, if you are interested in making a long-term investment in Intel's stock, I would wait until after earnings to start a position. Buying a stock the day before earnings is too much of a gamble. Waiting until after earnings flips the situation to a win/win scenario for potential investors. First, the company may confirm your bullish thesis and vastly reduce the risk in starting a position. Second, the company sells off on a miss due to a transitory issue, giving you a better entry point. Regardless, most initial pops after an earnings beat tend to fade in a few days, prior to moving higher.
So, even if Intel beats earnings estimates and rallies higher on the news, I am sure you will get another shot at a decent entry point in the near future. The market currently has no idea which way it wants to go. In times such as these, it is best to proceed with increased caution. Wait until after earnings prior to starting a position.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in INTC over the next 72 hours. 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.