One of the strongest groups of stocks prior to the recent market selloff that began in the last week July was semiconductors. This sector got a strong boost from Intel Corporation’s (NASDAQ/INTC) second-quarter numbers, which were quite strong. Only now are a number of other stocks in the semiconductor group pulling back with the broader market. It was a good trade that looks now to be over. Over for the entire group.
Intel is a good benchmark stock to follow, because so much of today’s economy uses semiconductors — computers, cell phones, consumer electronics, and cars. The company’s stock price had been holding up very well until it announced that it would purchase security company McAfee, Inc. (NYSE/MFE) for $7.7 billion. The market just isn’t sure about Intel’s corporate strategy with this purchase. Investors don’t have a sense as to whether this acquisition will be a good fit.
The company is also rumored to be interested in purchasing the wireless semiconductor business of Infineon Technologies AG (NYSE/IFX), which is Europe’s second largest chip-maker. This acquisition would allow Intel to manufacture chips for Apple’s “iPhone.” This is one area where Intel’s been lacking in operations. As we all know, smart phones have been tremendously popular.
Investors seem to like Intel’s strategy with Infineon Technologies, but not the acquisition of McAfee. It’s understandable, because investors don’t like to see companies purchase other businesses that operate outside of their core competency. McAfee has an existing alliance with Intel, but the company operates to secure corporate and consumer computers, an area quite unfamiliar for Intel.
Once all this acquisition dust settles, I think that Intel could be an attractive opportunity for large-cap investment. The stock is currently yielding close to 3.5%, because its price has been hammered over the last few weeks. The bear market has certainly helped with this move. Nobody expects the company to experience any runaway growth anytime soon, but earnings are still expected to tick higher over the coming years. It’s likely that Intel’s strategy to diversify through acquisition comes down to trying to accelerate growth in an otherwise growth-less economy.
Among several other large-cap companies, I’d keep Intel on my watch list. The stock is currently trading at its 52-week low and isn’t much loved by the Street.