(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Broadcom Ltd.'s (AVGO) stock has struggled recently, falling by over 13% since March 15, after its attempt to buy Qualcomm Inc. (QCOM) was derailed when President Donald Trump signed an executive order blocking the deal. But a technical analysis, the stock's fundamentals and bullish analysts price targets suggest the shares may have hit bottom and could rise by about 12% to approximately $260 from its current price around $232.
The stock has badly underperformed the iShares PHLX Semiconductor ETF (SOXX) this year, with shares of the chipmaker falling by nearly 8.3%, versus the semiconductor ETF which is up almost 3.5%. A clear divergence, a sign that Broadcom, a stock market darling that soared by 45% in 2017, has fallen out of favor among investors.
A Rebound to $260
The technical chart suggests a bottom may be in place, leading to a 12.5% rebound in the stock over the next few weeks. The key to the chart is technical support at approximately $228. That support level has been in place since early 2017 and held on the previous occasions. Additionally, volume has been steadily declining as well; perhaps another indication sellers are beginning to wane. Should selling pressures ease and support hold, shares could rise to nearly $260. Meanwhile, the SOXX ETF's fund managers increased the portfolio's AVGO holdings in recent days, according to data from iShares.
The relative strength index (RSI) also hit oversold levels back in early February, when the index fell below 30. But now, the RSI is beginning to trend higher, despite an overall downtrend in the price since peaking at $285 in late November. That change of direction in the RSI may signal a bullish divergence, also indicating Broadcom is poised to rise.
With the stock trading at only 11.1 times 2019 earnings estimates of $20.95 per share, the earnings multiple is near the lower end of its historical trading range. Additionally, analysts are extremely bullish, with nearly 91% of the 35 analysts giving the stock a buy or outperform rating. They have also raised their price targets on the stock over the past 52 weeks by nearly 30% to an average target of about $323, almost 40% higher than the current price.
For now, it would seem that the charts and the analysts are in favor of Broadcom's shares rebounding. However, if the stock market volatility persists and the current support level at $228 breaks, the stock may have a long way to fall.
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 12 months. Past performance is not indicative of future performance.