(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Options traders appear to be getting bullish on shares of Broadcom Inc. (AVGO) just as the analysts have been lowering their outlook for the stock. Options traders are betting shares of Broadcom rise about 12% to $270 by mid-June. The optimism comes as the stock is rebounding off its lowest levels in over a year.
Shares of the chipmaker are nearly 15% off their all-time high around $285 set in November of 2017. The poor stock performance has been a reflection of weak demand for its essential products in its smartphone business. (For more, see also: Chipmaker Broadcom Doesn't Need Apple to Rebound.)
The long straddle options strategy set to expire on June 15 is implying a rise or fall in the price of the stock by nearly 8%, placing the stock in a range of $231 to $269, from the $250 strike price. But the number of calls at that strike price heavily outweigh the puts by a ratio of over 5 to 1, with nearly 10,700 open call contracts, to only 2,000 open put contracts. The calls at the $250 strike price have increased by more than five times just since April 23, a significant rise in activity.
Rising to $270
Looking further down the options chain to the $270 strike price we find nearly 14,000 open call contracts. At a cost per contract of $1.50, the calls would need to rise to $271 to break even, about 12% higher than the stock’s current price around $243. More impressively, the number of contracts for the open interest has more than doubled since April 23, a sign of rising bullish sentiment.
The technical chart is also suggesting shares of Broadcom may be set to rise as well. The chart shows a well-defined uptrend in the stock and a critical support level around $227, that has now held on three occasions. Additionally, the relative strength index (RSI) hit oversold conditions when it fell below 30 in early February. It was only the fourth time since 2014 that the RSI reached such a low level. Should shares of Broadcom rise above $250, it would signal a technical breakout. (For more, see also: Broadcom Results Impress.)
Analysts Get Bearish
The optimism in the options and the technical setup comes in stark contrast to analysts who have been trimming their earnings outlook for 2018. Over the past 30 days, analysts have cut their earnings estimates by nearly 3%, to $19.41 per share, and revenue estimates by 2% to $20.79 billion. They also cut their price target on the stock as well, to an average of about $311 from $340 at the start of April, a drop of 8.5%.
With the company not scheduled to report results until some time at the start of June, investors and analysts should have plenty of time to decide which side will be right.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.