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Broadcom (Nasdaq: BRCM) is a semiconductor manufacturer that specializes in integrated circuits for wired and wireless communications. In terms of revenue, they are the second largest company in the integrated circuit industry, second only to Taiwan Semiconductor (NYSE: TSM).
Over the last six months, the stock has performed well and it was given a boost at the beginning of June when the company announced its intentions to sell its baseband business. This news was greeted with enthusiasm as the stock gapped almost 10% higher on the announcement. Apparently investors liked the idea of exiting this particular business and analysts did as well for the most part. There were three upgrades and one downgrade on the news.
After the announcement, the stock did continue to move higher for the next two weeks, but has since rolled over and lost approximately 4.5%. Looking at the weekly chart, we see a potential reason for the stock rolling lower. There is significant resistance in the $38.50-$39 area as this was a significant high in March 2012. It probably didn’t help that both the daily and weekly charts showed the stock deep into overbought territory either.
Looking at the sentiment toward Broadcom stock, we see a stock that is pretty highly regarded overall. The short-interest ratio is only 0.8 and the put/call ratio is in the bottom 10% of readings over the past year. After the three upgrades and one downgrade, there are 23 “buys”, 18 “holds” and one “sell” on the stock. These three indicators added together put my sentiment composite at 5.77. One month ago, the sentiment composite was at 8.72 as all three indicators were more neutrally skewed than they are now. After a jump in the stock price like Broadcom experienced, it is natural for the sentiment to become more positive. Unfortunately, the sentiment might be too bullish at this point.
From a fundamental perspective, the company has been struggling over the last few years as the average EPS growth rate has been -4%. This could be why investors were excited to see them leave the cellular business. If the company can reallocate the resources from the cellular business toward the more profitable divisions, it should serve them well as Broadcom does well with their margins and returns. The annual pre-tax margin is 20.4% and the ROE is 20.5%.
I can’t say that I would be in a hurry to buy Broadcom stock right now as the sentiment is too bullish for my liking and I would like to buy when it is a little closer to oversold on the weekly chart. The other possibility would be to buy it on a breakout above the $39 level. If one of those conditions is met, it becomes more attractive to me.
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