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Minefield In Miniature

By Mark Whistler

Tickers in this Article: INTC

Investors taking positions in semiconductors right now could very well be walking into a minefield. The first warnings went out when industry leader Intel (Nasdaq:INTC) received, not one, but two analyst downgrades in the first week of January.

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If Intel is struggling, the entire sector could be a danger zone in 2008.

Downgrades
It's rare that investors would hear the words Intel and downgrade in the same sentence, but that's exactly what greeted them at the start of the year. The first downgrade came from Banc of America analyst Sumit Dhanda, moving the firm's rating from 'Buy' to 'Neutral', based on growth concerns during the first half of 2008. The second downgrade was from JP Morgan Analyst Christopher Danely who moved the stock from 'Overweight' to 'Neutral' on similar concerns. (For a refresher on stock ratings, read Analyst Recommendations: Do Sell Ratings Exist?)

When the dust had cleared, Intel fell more than 15% for the week. Now, investors are likely wondering what the future will hold and whether Intel may have some more downside left.

Chipping Away At Consumer Spending
One thing is for certain right now: chipmakers are concerned about first quarter earnings, as consumers could slow PC purchases due to recession fears. Case in point, during the first week of January, the U.S. Labor Department said unemployment topped 5%, a two-year high for the economic measurement.

Fact is, when people aren't working, they scale back on purchases of items that they may not necessarily need. For most, new, shiny computers are just a luxury. What's more, over the years as computers have become more reliable, they tend to last longer than even a decade ago. At the end of the day, consumers could begin postponing PC purchases until economic conditions improve, especially if their current machines prove sufficient to last a few more years.

The Danger For Intel
Coming back to Intel, the picture certainly looks a little scary right now. If consumers hold off on PC purchases, the company could be in for some rough waters. The big moment for Intel (and other chip makers) will be when fourth quarter earnings begin rolling in later this month. Poor numbers for semiconductors, mixed with lowered earnings guidance, means the whole sector could begin falling through the floor I would argue.

Right now, it's probably a little too early to assume the worst, but this is certainly a time for caution. The average analyst estimate for the fourth quarter is for Intel to bring home 40 cents a share on $10.84 billion in revenue. Intel will report numbers on January 15. Investors who own the stock will want to pay close attention when the company reports.

It's important to remember that Intel is a sector leader and is a cash king, too. The company is sitting on just over $13 billion in cash; therfore, if there's one company that will weather rough seas in the tech environment, Intel is it. However, Wall Street fears can dampen the trading outlook for any stock, and regardless of Intel's bank account, the company is not immune to negative comments from analysts. What all of this comes down to is the semiconductor minefield could get very dangerous, especially if earnings start to blow up.

The Bottom Line
If there were ever a time for solid stop losses in place for investors who have money parked in chip-stocks, now would be it. Intel is facing some difficult times ahead, as its recent two analyst downgrades have highlighted. If the company fails to put up decent earnings results in its upcoming quarterly release, its recent downgrades may prove all too accurate.

For more on setting up a stop-loss, read The Stop-Loss Order - Make Sure You Use It.

By Mark Whistler

Mark Whistler is a trader, author and analyst. He is the senior market strategist at TradingMarkets.com and heads the Forex Trading Service Forex Force.

His books include "Trade With Passion and Purpose" (2007), "Trading Pairs" (2004), "Profit from China" (2006) and "Profit from Uranium" (2006). Mark's newest book, "The Swing Trader's Bible", co-authored with CNBC/Fox News regular guest Matt McCall, will be on shelves in the summer of 2008.

Whistler is also the founder of WallStreetRockStar.com and writes regularly for TraderDaily.com. In his spare time, Whistler operates an art gallery in Baltimore, Md., along with Eats For The Streets, a growing organization - dedicated to helping the homeless across America.

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