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Broadcom Stock Is Cheap, Poised to Pop on Earnings

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Broadcom Inc. (AVGO), the supplier of a wide range of semiconductors for many global applications, wanted to buy Qualcomm Incorporated (QCOM), which makes digital communications products around the world. Then, on March 12, a U.S. Treasury committee determined that the deal could not be completed for national security reasons.

Broadcom stock popped to $273.85 as merger-related trades were reversed on March 13. This spike was short lived, as the stock subsequently traded down to its 2018 low of $221.98 set on May 4, staying just above my annual value level of $221.29. This weakness was caused by the company pre-announcing lower-than-expected quarterly guidance on April 30. Broadcom closed Tuesday, June 5, at $259.26, up just 0.9% year to date and 5.5% below its 2018 intraday high of $274.26 set on Jan. 5. The stock is in recovery mode at 16.8% above its 2018 low of $221.98 set on May 4.

Broadcom is set to report quarterly results after the market closes on Thursday, June 7. Analysts expect the semiconductor giant to post earnings per share of $4.75 to $4.86. Some say that better-than-expected data center and enterprise storage applications will more that offset a drag from wireless services. It is important to keep in mind that 10% of Broadcom’s revenue comes from Apple, Inc.’s (AAPL) iPhones and internet-connected devices. (See also: Why Broadcom’s Stock Is Poised for Bigger Gains.)

The daily chart for Broadcom

Daily technical chart showing the performance of Broadcom Inc. (AVGO) stockCourtesy of MetaStock Xenith

The daily chart for Broadcom shows that the stock has been below a “death cross” since March 10, when the 50-day simple moving average slipped below the 200-day simple moving average, which indicates that lower prices lie ahead. The pressure is on for this bearish warning as the stock is above its 50-day and 200-day simple moving averages of $240.00 and $250.83, respectively. Note that strength on Tuesday tested but did not stay above my monthly pivot level for June at $260.23.

[Check out Chapter 2 of the Technical Analysis course on the Investopedia Academy to learn more about using simple moving averages to guide your trading decisions.]

The weekly chart for Broadcom

Weekly technical chart showing the performance of Broadcom Inc. (AVGO) stockCourtesy of MetaStock Xenith

The weekly chart for Broadcom is positive, with the stock above its five-week modified moving average of $247.26 and well above the 200-week simple moving average of $173.06, which is considered the “reversion to the mean.” The 12 x 3 x 3 weekly slow stochastic reading is projected to rise to 48.76 this week, up from 37.30 on June 1.

Given these charts and analysis, my trading strategy is to buy weakness to my annual value level of $221.29 and to reduce holdings on strength to my quarterly risky level of $273.82. My monthly pivot at $260.23 should remain a magnet. (For more, see: 9 Takeover Targets Broadcom May Pursue After Qualcomm.)

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June 6, 2018

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