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Tickers in this Article: INTC, AMD, BRCM, PMCS, TXN, CSCO, MSFT, GE, XOM, C
The more well-known a stock, the more efficient its market, and the tougher it is to deliver market-beating performance. That's the reality of market efficiency.

Intel (INTC) is a stock that suffers from the trap of market efficiency. Despite solid fundamentals, the computer chip giant is destined to stay stuck as a tech sector market performer.

At the end of the last quarter, Intel sat on $11.3 billion in cash and equivalents with just over $2 billion in debt, and last year the company delivered more than $14 billion in operating cash flow. The stock is trading at just 14 times expected 2006 earnings. Those numbers translate into good fundamentals and a lowly valuation. So, what's keeping the stock from outperforming?

For starters, investors are already invested in the stock, and they are unlikely to invest more. A bellwether of the technology sector, Intel is already one of the most widely held stocks in the world.

On top of that, a sizable chunk of Intel stock is held by index funds, whose managers cannot allocate more than a set amount of money into the stock. Put another way: with everybody already on the Intel boat, there is nobody left to jump aboard.

Moreover, Intel is also extremely closely watched. Your run-of-the-mill stock might be followed by a half dozen analysts. By contrast, Intel's investor relations web site lists 37 brokerage analysts covering its stock. That number does not include the thousands of buy-side analysts and even larger number of individual investors who scrutinize Intel's every move on a daily basis.

With so many people tracking Intel from almost every conceivable angle, it is fair to say that the stock's ability to surprise the market is severely handicapped. Odds are good that any news -- good or bad -- is already priced into Intel stock. At the same time, so much available information about the company makes it awfully tough for investors to gain an edge over the market.

Sure, Intel operates in the fast growth tech industry, but Intel's growth days are long gone. Analysts are forecasting negligible revenue growth of in 2006 and less than 10% in 2007. By and large, Intel remains dependent on the whims of finicky corporate IT spending cycles for its growth. That's not the kind of business that kindles the spirit of growth investors, especially when chip makers Advanced Micro Devices (AMD), Broadcom (BRCM), PNC-Sierra (PMCS) and even Texas Instruments (TXN) are delivering much bigger growth numbers.



Like tech sector behemoths Cisco Systems (CSCO) and Microsoft (MSFT), as well as other mega-cap stocks such as General Electronic (GE) and Exxon Mobil (XOM) and CitiGroup (C), Intel suffers from the law of large numbers. When you already have upwards of $38 billion in annual revenue, growth in the double digits is hard to come by.

Most years, Intel spends about $4 billion buying back shares, and last year it purchased a whopping $25 billion worth of them. Still, the buybacks have had little long term impact on long term returns. Perhaps Intel should jack up its 2.1% dividend. But that's a thorny matter for Intel management. While a dividend increase would immediately improve shareholder returns, it would also be a further admission that the company has run out of investment opportunities.

Of course, the same factors that hold back Intel stock from rising quickly will also prevent it from falling too far. But that's hardly a reason to put money on a stock. There are plenty of better growth opportunities -- smaller and less well-researched stocks -- floating around. It's safe to say that investors should look elsewhere for market-beating returns.

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