Broadcom (AVGO - Get Report) has always been a popular momentum stock, but value investors should buy the stock for its generous dividend. My call is to buy Broadcom at its monthly pivot at $282.42 and add to positions on weakness to its annual value level at $260.78.
This stock can be quite volatile as we have seen so far this week. After the close on Monday the company announced a two-year deal with Apple (AAPL - Get Report) to supply components for products including smartphones. This began a wave of volatility. In after hours trading on Monday, the stock nearly tested its quarterly risky level at $295.09. Tuesday's opening high was $291.75 then came a wave lower to its monthly pivot for June at $282.42.
When investing in Broadcom, you must be willing to live with downside volatility. The stock was hit hard in May after setting its all-time intraday high of $323.20 on May 1 as the semiconductor giant fell by a bear market 22.6% to its May 28 low at $250.09.
Broadcom is known as a momentum stock, but its also a value stock. Its P/E ratio is 14.75 with a dividend yield of 3.86%, according to Macrotrends.
Broadcom reports quarterly results after the closing bell on Thursday, June 13. Analysts expect the semiconductor giant to earn $5.18 to $5.35 per share. The data base I use tracks earnings back to Nov. 19, 2012 and the company had always beaten Wall Street earnings-per-share estimates.
Keep in mind that in 2018, Broadcom wanted to buy Qualcomm (QCOM - Get Report) but that was stopped by President Trump on national security concerns. Soon after this deal was rejected, the company fortified its data center business by purchasing enterprise software firm CA Technologies and this combination will be scrutinized in Thursday's earnings report. The negative impact from China tariffs is likely priced into the share price decline in May. Guidance will thus be as important to continue its earnings winning streak. The deal with Apple is an important discussion point when offering guidance.
The Daily Chart for Broadcom
Courtesy of Refinitiv XENITH
The daily chart for Broadcom shows that the stock has been above a "golden cross" since Jan. 8 when the 50-day simple moving average rose above the 200-day simple moving average, indicating that higher prices would follow. The stock could have been bought that day at the 200-day then at $235.42. The stock closed Dec. 31 at $254.28, which was an important input into my proprietary analytics. Its annual pivot for 2019 is $260.78. Its semiannual risky level is $310.83. The close of $300.71 on March 29 was an input to my analytics and resulted in the second quarter pivot at $295.09. The close of $251.64 on May 31 was an input that resulted in the monthly pivot for June at $282.42. Note how the 200-day SMA lines up with the annual pivot at $260.77.
The Weekly Chart for Broadcom
Courtesy of Refinitiv XENITH
The weekly chart for Broadcom will be negative if this week's close is below its five-week modified moving average of $281.96. The stock is well above its 200-week simple moving average or "reversion to the mean" at $211.38. The 12x3x3 weekly slow stochastic reading is projected to decline to 33.98 this week down from 37.56 on June 7. At the May 1 high, this reading was 91.86 above the 90.00 threshold as an "inflating parabolic bubble."
Trading Strategy: Buy at its monthly pivot at $282.42 and add to positions on weakness to my annual pivot at $260.78. Reduce holdings on strength to quarterly and semiannual risky levels at $295.09 and $310.83, respectively.
How to Use Value Levels and Risky Levels:
Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original semiannual and annual levels remain in play. The weekly level changes each week; the monthly level changed at the end of January, February, March, April and May. The quarterly level was changed at the end of March. My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.
How to Use 12x3x3 Weekly Slow Stochastic Readings:
My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years. The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best. The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble" as a bubble always pops. I also call a reading below 10.00 as being "too cheap to ignore."