(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Broadcom Corp.'s (AVGO) stock has fallen by almost 15% since the middle of July. In mid-July the company announced it would buy CA Inc. (CA) for $19 billion. Now there are signs the chipmaker may be about to rebound by 11% in the coming weeks, from its current price of $214.50, based on technical analysis. Options traders are also betting shares rise by the middle of September. (For more, see also: Chipmaker Broadcom Doesn't Need Apple to Rebound.)
The company is due to report its fiscal third-quarter results on September 6. Analysts are looking for the company to say profits grew by almost 17% to $4.79 per share while increasing revenue by 13% to $5.1 billion.
A Needed Bounce
The technical chart suggests Broadcom's stock may turn higher in the weeks leading up to the results. The stock has found a stable level of technical support around $200. Additionally, there is a gap in the chart created when shares plunged on the announcement the company was buying CA. Should the stock look to refill the gap, shares may head higher by 11% to $239. (For more, see also: Top 4 Broadcom Shareholders.)
Another positive sign is the relative strength index (RSI) which has started to trend higher. The RSI bottomed at oversold levels in the middle of July, falling well below a level of 30. But since hitting that bottom, the RSI has turned higher, despite the stock retesting the prior lows, which is a bullish divergence. It suggests that bullish momentum is now beginning to return to the stock. Additionally, volume levels have dropped in recent weeks, and that may show the number of sellers in the stock is starting to fade.
At least some options traders are betting the stock will rise by options expiration on September 21. Open interest levels for the $220 calls have increased since the end of July and are currently around 6,000 contracts. A buyer of the calls would need the stock to rise to about $225, about 5% higher than the current price, to earn a profit if holding the calls until expiration. Some traders are betting shares rise as high as $232, almost 9% higher, based on the call activity at the $230 strike price.
Shares of Broadcom are trading at 10 times 2019 earnings estimates, its lowest level over the past year. That is well below the average of 15.6 for the top 25 stocks in the iShares PHLX Semiconductor ETF (SOXX).
The change in sentiment may be a sign investors are getting ready for the company to deliver strong quarterly results, or that shares have become too cheap. Whatever the reason, the stock looks ready for a much-needed rebound.
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.