Home World Economy Broadcom Goes Hostile in Bid for Qualcomm

Broadcom Goes Hostile in Bid for Qualcomm

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Broadcom Limited (AVGO​) has gone hostile in its bid for Qualcomm Incorporated (QCOM​). Digital communications products maker Qualcomm turned down the Broadcom’s initial proposal, and the suitor has now proposed its own slate of 11 directors to replace the current Qualcomm board. It could be a long battle, as Qualcomm’s 2018 annual shareholder meeting will not be held until March 6.

Broadcom, which supplies a wide range of semiconductors for many global applications, and QCOM are among the top five holdings of the iShares PHLX Semiconductor ETF (SOXX​). Together, they make up 16.44% of the fund’s holdings; Intel Corporation (INTC​), at 8.95%, is the largest.

The Philadelphia Semiconductor Index (SOX) closed Tuesday at 1,227.74, up 35.4% year to date and solidly in bull market territory at 51.1% above its post-election low of 812.33 set on Nov. 10, 2016. The SOX is an economic indicator, as almost every product we buy contains computer chips – from our motor vehicles to our hand-held devices. The SOX set its all time high of 1,342.05 on Nov. 24 and is down 8.5% since then, which could be an early sign of economic weakness. (See also: SOX Semiconductor Index at 17-Year Resistance.)

Broadcom stock closed Tuesday at $261.65, up 48% year to date and in bull market territory at 62.9% above its post-election low of $160.62 set on Dec. 12, 2016. The stock is down 8.4% since its all-time intraday high of $285.68 set on Nov. 27. Meanwhile, Qualcomm stock closed Tuesday at $64.69, down 0.8% year to date and in bull market territory at 32.2% above its post-election low of $48.92 set on Sept. 8. The stock is down 7.9% since its all-time intraday high of $70.24 set on Dec. 13, 2016.

Analysts expect Broadcom to post earnings per share between $4.52 and $4.61 when it reports results after the closing bell on Dec. 6. Some analysts say that the chipmaker will benefit from the sale of components for the Apple Inc. (AAPL​) iPhone X. Others have earnings estimates as low as $4.40 per share. Adding to the earnings confusion, Susquehanna Financial reiterated its positive rating for Broadcom stock with an increased price target of $325.00.

The daily chart for Broadcom

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

The daily chart for Broadcom shows that the stock has been above a “golden cross” since Dec. 21, 2015, when it closed at $145.80. A “golden cross” occurs when the 50-day simple moving average (SMA) rises above the 200-day SMA, indicating that higher prices lie ahead. Today, the 50-day SMA is $257.90, with the 200-day SMA at $241.25. (For more, see: Top 4 Broadcom Shareholders.)

The weekly chart for Broadcom

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

The weekly chart for Broadcom will be downgraded to negative if the stock ends this week below its five-week modified moving average of $264.14. The 12 x 3 x 3 weekly slow stochastic reading is projected to end this week at 77.11, down from 77.60 on Dec. 1.

Given these charts and analysis, my trading strategy is to buy weakness to the 200-day simple moving average, currently at $241.25 and rising each day, and to reduce holdings on strength to my semiannual and monthly risky levels of $275.69 and $282.02, respectively. My quarterly pivot (or magnet) is $261.97.

The weekly chart for Qualcomm

Weekly technical chart showing the performance of Qualcomm Incorporated (QCOM) stockCourtesy of MetaStock Xenith

The weekly chart for Qualcomm is positive but overbought in anticipation of the Broadcom hostile takeover. The stock is above its five-week modified moving average of $62.24. Note how the stock has been trading back and forth around its 200-week simple moving average, or “reversion to the mean,” since the week of Jan. 30, 2015, with the average now at $62.95. The 12 x 3 x 3 weekly slow stochastic reading is projected to end this week at 86.25, well above the overbought threshold of 80.00.

Given these charts and analysis, my trading strategy is to buy weakness to my quarterly, semiannual and monthly value levels at $58.41, $56.54 and $55.38, respectively, and to reduce holdings on strength to my weekly and annual risky levels of $70.27 and $84.45, respectively. (For additional reading, check out: Qualcomm: Stifel Downgrades, Despite Broadcom.)    

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