Wed09172014

Business & Real Estate

A game plan for the market

Checking market volatility after its biggest weekly advance since last July, it might be time to review where investors have been and where they are now. The heart of the earnings-reporting season has arrived, with stocks at an impasse and biotechnology and Internet commerce impacting the market.

Yet, most of the averages are less than 5 percent under all-time highs, and a breakout above 16,576.66 on the Dow Jones industrial average would indicate the bulls are still around. Without new highs on the Dow and seeing a breakdown below the Feb. 3 closing low of 15,372.80, the market could indicate a bear-market signal.

Federal Reserve Chairwoman Janet Yellen reiterated the need for an accommodative policy and the importance of keeping an eye on instability. She said the economic recovery will be nearly complete within two years, and short-term interest rates likely will stay near zero for two more years.

With declines in the momentum names creating nervousness, investors rotated into more defensive stocks after the earnings releases.

My conclusion is to stay fully invested for the time being, but drop to 80 percent when any bear-market signals approach.

Two Town Crier “50” stocks reported first-quarter results last week.

• Intel Corp. (INTC; $26.94) posted weak results that topped even weaker projections made by analysts.

Intel’s March-quarter earnings slumped 5 percent to 38 cents per share, topping the consensus by a penny. Declining computer sales hit Intel, a drop the company hopes to offset by putting its chips in tablets.

Revenue crept 1 percent higher to $12.76 billion as an 11 percent jump in semiconductor sales to data centers narrowly offset a 1 percent decline in its larger PC segment. Intel’s revenue guidance for the June quarter has a midpoint of $13 billion, slightly ahead of the $12.96 million consensus.

Despite the weak quarter, there are more positives than negatives to Intel stock. Efficiency improvements are at the core of the company’s mission. Intel knows that real growth today comes from mobile markets, which is one of the reasons it is aggressively pursuing Chinese tablet makers.

Intel’s upgrade and downgrade history supports a buy or an outperform recommendation. The mean target price for stock is $26.60, with a high of $35. What makes this an interesting investment is the 3.4 percent dividend yield.

• IBM Corp. (IBM; $192.55) saw first-quarter earnings fall and revenue come in below Wall Street expectations. The company’s hardware business declined because of weaker demand in China and emerging markets. IBM stock was down 3.25 percent last week, but it’s still up 5 percent for the year. The largest drop was in its Systems and Technology unit, where revenue dropped 23 percent to $22.39 billion.

IBM last week reported that it earned $2.38 billion, or $2.29 per share, in the first quarter, down 21 percent from $3.03 billion, or $22.70 per share, a year earlier. Revenue fell 4 percent to $22.5 billion, marking the eighth consecutive quarter of revenue decline.

Its E-mail Processing System should grow slowly through 2020 as it invests more in cloud computing services and spends less on information technology. The company is in the process of selling its low-end server business to China’s Lenovo Group Ltd. as it shifts toward the more lucrative software and services areas.

Citigroup downgraded the stock last week from a buy to neutral, while Deutsche Bank deemed it a hold. The median target price for IBM stock $190, with a high of $225.

Clyde Noel is a Los Altos Hills resident and longtime investor in stocks. He has a small investment in both Intel and IBM stock.

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