A Closer Look at... Xilinx Inc., Altera Corp., and Linear Technology Corp.

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While large-cap semiconductor stocks, such as industry giant Intel Corp. ( INTC ), have struggled to maintain a positive bias during the past year, small-cap and mid-cap chip firms are performing quite well. Overall, the Semiconductor HOLDRS Trust ( SMH ) has added more than 25% during the past 52 weeks, with the exchange-traded fund ( ETF ) rising roughly 4% year-to-date. By comparison, INTC's performance has been flat during the same time frames, with the stock down about 0.4% since the start of 2011, and up 0.53% in the past year.

Weekly chart of SMH since September 2010 with 10-week moving average

Despite this disparity in performance, INTC and its fellow large-cap stocks have garnered the bulk of the sector's bullish sentiment. For instance, only about 53% of the 1,169 analysts covering SMH stocks rate them a "buy" or better, compared to nearly 60% of the 42 brokerage firms following INTC. Additionally, SMH's short-to-float ratio arrives at a whopping 51%, versus less than 1% for Intel. Given the sector's overall strength, and Intel's relative weakness, there could be plenty of bullish opportunities among the smaller semiconductor stocks.

Xilinx Inc.

With a market capitalization of roughly $8.19 billion, Xilinx Inc. ( XLNX ) is large by mid-cap standards, but is dwarfed by Intel's market capitalization -- a whopping $116.78 billion. However, its smaller size has allowed XLNX to be considerably more nimble, with the company posting a Street-beating 42% jump in third-quarter earnings after the close on Jan. 19. The better-than-expected report extended the company's fiscal winning streak, with XLNX having bested the consensus estimate in each of the prior four reporting periods.

XLNX is no slouch in terms of price action, either. During the past 52 weeks, the shares have rallied more than 24%, with the stock adding nearly 8% since the start of 2011. The equity has also broken out to a series of multi-year highs, bolstered by support at its 10-day and 20-day moving averages. XLNX is currently consolidating those gains just above its 10-day trendline, as it weathers the recent spike in market volatility.

Daily chart of XLNX since October 2010 with 10-day and 20-day moving averages

Despite this strong price action, investors have remained stubbornly bearish on the security. Among options traders, the stock's Schaeffer's put/call open interest ratio (SOIR) arrives at 1.37, as puts outnumber calls among near-term options. This ratio also arrives just one percentage point shy of an annual peak, pointing toward an extreme in bearish sentiment.

What's more, put buying is growing in popularity on the International Securities Exchange (ISE) and Chicago Board Options Exchange ( CBOE ). During the prior two weeks, 1.38 XLNX puts were bought to open for every one call purchased, resulting in a 10-day ISE/CBOE put/call volume ratio of 1.38. This ratio ranks above 60% of all those taken in the past year, meaning that options traders have rarely snapped up puts over calls at a faster pace in the past year.

Analysts are also betting against XLNX, as 16 of the 24 brokerage firms following the shares rate them a "hold" or worse. The firm's consensus 12-month price target of $30.28, as reported by Thomson Reuters , also suggests a lack of confidence from the analyst community, as XLNX closed at $31.26 on Thursday. As such, any upgrades or price-target increases could provide additional buying pressure.

Finally, short interest rose by more than 13% during the prior month, resulting in about 30.7 million XLNX shares sold short. With a short-to-float ratio of 11.87%, the equity has plenty of fuel for a potential short-covering rally as it extends its current uptrend. Traders looking to take advantage of this strong price action should consider the stock's March 31 call.

Altera Corp.

Sporting a market capitalization of roughly $11.78 billion, Altera Corp. (ALTR) is carrying a few more pounds around the middle than Xilinx. After the close on Tuesday, Jan. 25, Altera is expected to post a fourth-quarter profit of 71 cents per share, more than doubling last year's earnings of 34 cents per share for the same period. Historically, the company has bested Wall Street's expectations in each of the prior four reporting periods, with an average upside surprise of roughly 14.5%.

Technically, ALTR is by far the best performing of today's focus stocks, with the shares soaring nearly 70% during the past year. Additionally, the equity has extended its strong price action into 2011, gaining almost 6% since the start of the year. The stock's 10-week moving average has provided a helping hand since September 2010, with ALTR trending steadily higher along this intermediate-term trendline during this time frame. What's more, the stock's recent pullback to this moving average could mark an excellent entry point for bullish investors ahead of the company's quarterly report.

Weekly chart of ALTR since Sept. 2010 with 10-week moving averages

On the sentiment front, ALTR bears are in full retreat ahead of the company's turn in the earnings spotlight. Although puts are quite popular, with the equity's SOIR of 1.46 ranking above 63% of all those taken during the past year, ALTR's ISE/CBOE 10-day call/put volume ratio has ballooned to 8.02, meaning that more than eight calls have been bought to open for every one put purchased in the prior two weeks. This ratio also ranks above 98% of all those taken in the past year.

While additional attention to ALTR calls could be a sign of buying strength, contrarians will want to be alert to a bullish frenzy ahead of the company's earnings report, as it could be a sign that speculators have raised the bar.

There is also room for potential upgrades on ALTR. According to data from Zacks , 14 of the 24 analysts following the shares still rate them a "hold" or worse. Upgrades from this group of holdouts could bring more buyers to the table. Traders looking to take advantage of an extended rally by the equity should consider a March 35 call.

Linear Technology Corp.

One final semiconductor stock to consider is Linear Technology Corp. (LLTC). While the company's market cap of $7.83 billion ranks it below the rest of today's focus stocks, Linear proved that it could be more nimble than most of its competitors earlier this week. Specifically, on Tuesday, Jan. 18, the company announced that its second-quarter net income nearly doubled to $143.7 million, or 62 cents per share. Revenue rose over 50% to $383.6 million. The results easily topped the consensus estimate for earnings of 58 cents per share on revenue of $379.7 million.

Technically speaking, the stock is on solid footing, having rallied more than 22% during the prior 52 weeks. The shares have run into some turmoil in 2011, gaining a mere 0.8% year-to-date, but LLTC still maintains key support at its rising 10-week and 20-week moving averages. Currently, the shares are consolidating into the former of these intermediate-term trendlines, creating a bit of a trading range between the $34 and $35 levels. However, with the stock's 10-week moving average pushing into the region, LLTC could be on the verge of another leg higher in its longer-term rally.

Weekly chart of LLTC since August 2010 with 10-week and 20-week moving averages

Checking in with investor sentiment, options traders remain quite bearish toward LLTC, with the stock's SOIR of 1.03 arriving above 85% of all those taken in the past year. Furthermore, the security's 10-day ISE/CBOE put/call volume ratio of 1.06 ranks in the 73rd percentile of its annual range.

Zacks

Finally, short interest accounts for a respectable 6.07% of the stock's total float, providing ample fuel for a potential short-covering rally that could amplify any breakout rally for LLTC. Given this data, investors might want to consider a May 32 call to take advantage of a potential unwinding of this negativity.

The winter 2011 issue of SENTIMENT magazine is now available here.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

All Rights Reserved. Unauthorized reproduction of any SIR publication is strictly prohibited.


This article appears in: Investing , Options

Referenced Stocks: CBOE , ETF , INTC , SMH , XLNX

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