Intel's stock rally shades prospects for smaller peers in chip sector
Investors are rotating funds into the chip giant as sector index is seen heading for steeper falls
The recent rally in Intel Corp may signal weakness for other semiconductor stocks.
Meanwhile, the Philadelphia Semiconductor Index has fallen 3.5 per cent during the same period - and there could be further declines ahead.
Traders increasingly had transferred money into Intel from other chipmakers in recent months - "taking from Peter to pay Paul", said Jim Stellakis, the founder and director of research at Technical Alpha.
This underscored why Intel's peers had become less attractive, particularly amid a period of seasonal weakness, Stellakis said.
The Philadelphia index - comprising Intel, Micron Technology, Texas Instruments and 27 other companies - has fallen about 5.7 per cent since June 30; the Standard & Poor's 500 Index is down 2.6 per cent. On a trailing 10-year basis, the semiconductor group lagged the benchmark index by an average of 1.6 percentage points last month and almost 1.5 points this month.
Since 1995, shares of Intel, the world's largest semiconductor maker, have outpaced this index for at least eight months on six occasions, all of which coincided with periods when the group trailed the S&P 500, according to analysis conducted by Stellakis.
"If history is any guide, semiconductor bulls should keep an eye on Intel," he said.
Global information-technology spending will grow 2.1 per cent to US$3.7 trillion this year, down from a March estimate of 3.2 per cent, industry researcher Gartner said in June. Such expenditures were flat last year, compared with 2012.
"When Intel is doing well, it fundamentally crowds out" some of its smaller competitors, spurring inflows into this technology giant, said Andrew Burkly, the head of institutional portfolio strategy at Oppenheimer. Intel's stock had been buoyed because it was very liquid and a large-cap benchmark for many portfolios.
Intel also made one of the most significant upward revisions in five years to its earnings forecast when it reported quarterly results on July 15, Burkly said.
Fiscal 2014 sales would grow about 5 per cent to US$55.3 billion from US$52.7 billion last year, the company announced.
Analysts had, in turn, raised their earnings estimates, indicating the breadth of sentiment was "broadly improving and has high conviction behind it", Burkly said, adding this was one reason why he liked the stock.
Longer term, the bull case for semiconductor stocks is reinforced with the Philadelphia index trading to a three-year relative high on July 16, after bucking seasonal weakness in the prior month. Between 2004 and last year, the semiconductor group trailed the S&P 500 by an average of 1.5 percentage points in June, although it outpaced the benchmark by almost 4.1 percentage points this past June.
There was a "revolutionary period" under way in this industry as the need for semiconductors continued to spread beyond computers into automobiles and other industrial devices, so investors might "reset their expectations", said David Mazza, a research head at State Street Corp.
