Why Broadcom May Rise As Much As 17%

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

The bets are rising that Broadcom Ltd. (AVGO) stock will continue to increase, and now that the Qualcomm Inc. (QCOM) deal is officially dead, those odds have improved. The stock has technically broken out, while a number of options bets have increased, suggesting shares could rise by as much as 17 percent. The stock has also received a series of price target raises from many analysts. 

Broadcom is set to report results on March 15 after the close of trading, and analysts are looking for the company to report that fiscal first-quarter revenue grew by 20.5 percent to $4.998 billion, while earnings are expected to have increased by 27 percent to $4.62 per share. But guidance may be the key, with analysts looking for fiscal second-quarter revenue of $5.024 billion, and earnings of $4.65. 

But even more critical to driving the share price higher may be the news that President Trump blocked Broadcom's acquisition of Qualcomm. The report appears to have been a relief to Broadcom investors, sending shares higher in recent days. (See more: Why Did Trump Block Broadcom's Bid for Qualcomm?)

Technical Breakout

The stock seems to have broken out, with the price rising above a downtrend that dates back to late November while rising above a critical resistance level around $258. The chart also shows the stock retested both of those critical levels over the past few trading days. This could lead shares to rise to roughly $286 from its closing price of $260.70 on March 14 – an increase of about 9 percent. 

Options Bets Rising

(Interactive Brokers)

Options traders have been betting shares of Broadcom rise as well since the news of the Qualcomm deal termination. The options set to expire on June 15 imply the stock could rise by or fall by about 13 percent from the $270 strike price. That puts the stock in a trading range of roughly $236 to $303. But the number of calls outweigh the puts by nearly 42 to 1, with 5,250 open call contracts to only 124 put contracts.

(Interactive Brokers)

A Rise To $313?

The open interest has been rising across the June expiration. On March 8, the total number of puts and calls at the $270 strike price stood at only 3,000 contracts; now it stands at roughly 5,400. 

Meanwhile, the $300 strike price previously had a total open interest of 2,800 contracts on March 8. As of March 15, that rose to approximately 5,100. The $300 strike price has nearly 5,100 calls on the open interest and require a breakeven price of $315, a rise of about 17.5 percent from the stock's price of approximately $260.60 on March 14.

Analyst Are Bullish

Merrill Lynch initiated Broadcom with a buy rating and a $340 price target, while Deutsche rates the stock a buy with a $325 price target. The average price target on the stock is $321, with 93 percent of analysts rating the stock a buy or outperform, according to YCharts. 

For now, there seems to be some consensus amongst the charts, the options market, and the analyst community that may make Broadcom hard to ignore. 

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 holdingsInformation 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. 

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