Broadcom

1/22/12

Last week’s recommendation of Cliff’s Natural Resources, netted a flat week, but the stock did hit a high of $73.  The fact that it did not pull back indicates a continuing bullish trend and you should stick with it.  This week I’m recommending a stock that I just recently bought, Broadcom (BRCM).  Broadcom designs and develops semiconductors for wired and wireless communications.  They enable voice, media, data and digital content to your phone, tv and tablet.  While not a big part of the iPhone (That belongs to Qualcomm), Broadcom chips are found in most Android powered phones and tablets.  BRCM is closed Friday at $35, which is a great entry point for this stock.  It’s 52 week high is $46.75 and low is $27.59. 

Broadcom has a market cap of just $18.86B, much less than it’s biggest competitor, Qualcomm (QCOM), which has a market cap of $97.04B.  I like Broadcom over Qualcomm for many reasons, among them is BRCM is slightly cheaper, trading at just 12 times forward earnings and a Price-to-earnings (PEG) ratio of a measly .81.  With almost $6/share in cash, the stock is trading even cheaper than its 12 P/E indicates.  With just $698M in debt, Broadcom has over $3B in cash and pays out a 1% dividend. 

From a technical perspective, BRCM has broken out to the upside on almost twice the average volume over the last 10 days.  One of the most bullish technical indicators I’ve seen in the stock is a breakaway gap above it’s 200 moving average of $34.01 on 1/18 with it’s largest volume since late July.  Since then, BRCM traded up to it’s 38.2% Fibonacci retracement of $35.15, which also happens to be where its current downtrend line comes to.  While BRCM didn’t break through that line last week, it ended the week up almost 9%, again, on very large volume.  Additionally, Broadcom built a perfect inverted head-and-shoulders at the bottom of a 5^th wave down on a weekly and daily chart. 

One thing that I’ve been noticing so far this month is there is a movement out of the best of breed and into the laggards.  You see it with US Bank selling off slightly, while Bank of America and Wells Fargo are rallying.  Up until Friday, IBM had been selling off of its all-time highs, while Microsoft was making new 52 week highs.  I think this trend continues where people will look to be selling out of QCOM and into Broadcom.   

Broadcom reports earnings on 1/31, which should be strong, based on what other chip makers earnings so far this season.  Over the next 3 months, I’m looking for a move up to $39.83 (61.8% Fibonacci retracement) and for the year, I expect a move to $42.50 mark, which is where I would look to take profits.  I see very limited downside risk, but being a technology company, give yourself some room to work with a stop loss a little more than 5% at $32.26. 

Full disclosure:  I currently am long BRCM from $34.34 and have been long since 1/19/12.