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3 Ways To Trade Chip Heavyweight Broadcom With The Stock Near All-Time Highs

By Investing.com (Tezcan Gecgil/Investing.com )Stock MarketsSep 13, 2021 15:25
ng.investing.com/analysis/3-ways-to-trade-chip-heavyweight-broadcom-with-the-stock-near-alltime-highs-91422
3 Ways To Trade Chip Heavyweight Broadcom With The Stock Near All-Time Highs
By Investing.com (Tezcan Gecgil/Investing.com )   |  Sep 13, 2021 15:25
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  • Broadcom stock has had a strong year and saw a record high on Aug. 30.
  • With a dividend yield of 2.9%, shares of the chip heavyweight also appeal to passive income seekers.
  • Potential buy-and-hold investors could regard a short-term decline toward $470 as a better entry point.

Semiconductor investors have seen solid returns from Broadcom (NASDAQ:AVGO) so far in 2021. AVGO shares, which are up close to 14% year-to-date (YTD), hit an all-time high (ATH) of $507.85 on Aug 30. On Sept. 10, the stock closed at $498.15.

AVGO Weekly TTM
AVGO Weekly TTM

The 52-week range for shares has been $343.48 - $507.85, while the companys market capitalization (cap) stands at $204.3 billion. The current price level supports a dividend yield of 2.9%. Therefore, many income-oriented tech investors follow the shares closely.

On Sept. 2, Broadcom issued metrics for the third quarter of fiscal year 2021, ended Aug.1. Revenue of almost $6.78 billion increased 16% year-over-year (YOY). Non-GAAP diluted EPS was $6.96.

CEO Hock Tan said of the results:

“Broadcom delivered record revenues in the third quarter reflecting our product and technology leadership across multiple secular growth markets in cloud, 5G infrastructure, broadband, and wireless.”

Management’s revenue guidance for Q4 came in at $7.35 billion, up 14% from the prior year period. AVGO's fiscal fourth quarter will end on Oct. 31.

San Jose, California-based Broadcom has a robust product portfolio. In addition to semiconductor solutions, it provides infrastructure software to a large number of enterprises. In fact, the company highlights:

“99.9% of All Internet Traffic Crosses at Least One Broadcom Chip.”

Put another way, for long term tech investors, AVGO stock has a lot to offer.

What To Expect From AVGO Stock

Among 30 analysts polled via Investing.com, Broadcom stock has anoutperform' rating.

AVGO Consensus Estimates
AVGO Consensus Estimates

Chart: Investing.com

The shares have a 12-month price target of $538.36, implying a return of about 8% from current levels. In other words, the Street’s expectation is for a modest price appreciation. The 12-month price range currently stands between $198 and $600.

The trailing P/E, P/S and P/B ratios for Broadcom stock stand at 36.9x, 7.73x and 8.43x, respectively. By comparison, we can also look at ratios as well as YTD stock price changes and dividend yields for several other semiconductor names, including Analog Devices (NASDAQ:ADI), Intel (NASDAQ:INTC), NVIDIA (NASDAQ:NVDA) and Texas Instruments (NASDAQ:TXN).

Chip Stock Majors Comparative Ratios
Chip Stock Majors Comparative Ratios

As these metrics show, thus far in 2021, investors have rewarded chip shares differently. Therefore, such valuation ratios are not enough by themselves to decide on the long-term growth potential for widely-followed tech names.

Investors who watch technical charts might be interested to know that a number of AVGO stock short-term oscillators are overbought. Although they can stay extended for weeks, if not months, potential profit-taking could also be around the corner.

If the broader tech shares were to come under pressure during the rest of the month or in October, we could potentially see AVGO stock decline toward $470. If the stock does not find support at that level, the next leg could take AVGO toward $450, after which it could trade sideways while it establishes a new base.

Finally, as part of the short-term sentiment analysis, it would be important to look at the implied volatility (IV) levels for Broadcom options. This metric typically shows us the market's opinion of potential moves in a security. However, this metric does not forecast the direction of the move.

AVGOs current implied volatility is 22.8, which is lower than the 20-day moving average of 36.3. This means implied volatility is trending lower. Although the current IV level could change, for now, the market does not seem to expect extreme choppiness in the shares.

Our expectation is for the stock price to range-trade mainly between $470 and $500, especially during the remainder of September and possibly in early October. A potential decline toward $470 would offer new AVGO investors a better entry point.

As a respected dividend play in the tech sector, any potential decline in the shares are likely to be short-lived. Toward the end of the year, we could possibly see a new leg up emerge in Broadcom stock that would eventually lead to a new ATH.

3 Possible Trades

1. Buy AVGO Stock At Current Levels

Investors who are not concerned with daily moves in price and who believe in the long-term potential of the company could consider investing in Broadcom shares now.

On Sept. 10, AVGO shares closed at $498.15. Buy-and-hold investors should expect to keep this long position for several months while the stock first makes another attempt at the record high of $507.85, and then toward $538.36, analysts’ consensus estimate. Such a move would lead to a return of about 8%.

We should remind readers that a number of brokers enable retail investors to buy fractional shares, whereby they can allocate smaller sums in companies whose share prices are high.

Meanwhile, investors who are concerned about large declines might also consider placing a stop-loss at about 3-5% below their entry point.

2. Buy An ETF With Broadcom As A Leading Holding

Readers who do not want to commit capital to AVGO stock but would still like to have substantial exposure to the shares could consider researching a fund that holds the company as a top holding.

Examples of such ETFs include:

  • First Trust NASDAQ Technology Dividend Index Fund (NASDAQ:TDIV): This fund is up 18.1% YTD, and AVGOs weighting in the ETF is 8.11%;
  • Invesco PHLX Semiconductor ETF (NASDAQ:SOXQ): This new fund is up 7.1% since inception in June, and AVGO stocks weighting is 7.88%;
  • Schwab US Dividend Equity ETF (NYSE:SCHD): The fund is up 18.5% YTD, and AVGOs weighting is 4.28%.

3. Bear Put Spread

Readers who believe there could be profit-taking in AVGO stock in the short run might consider initiating a bear put spread strategy. However, as it involves options, this set up will not be appropriate for all investors. The position would also need monitoring.

Yet, this trade set up might appeal to long-term Broadcom investors who could use it in conjunction with their long stock holding. Such a bear put spread would offer some short-term protection against a decline in price in the coming weeks.

This spread requires a trader to have one long AVGO put with a higher strike price and one short put with a lower strike price. Both puts will have the same expiration date.

Such a bear put spread would be established for a net debit (or net cost). It will profit if Broadcom shares decline in price.

For instance, the trader might buy an out-of-the-money (OTM) put option, like the AVGO Dec.17 480-strike put option. This option is currently offered at $21.35. Thus, it would cost the trader $2,135 to own this put option, which expires in about three months.

At the same time, the trader would sell another put option with a lower strike, like the AVGO Dec.17 460-strike put option. This option is currently offered at $14.60. Thus, the trader would receive $1,460 to sell this put option, which also expires in slightly over three months.

The maximum risk of this trade would be equal to the cost of the put spread (plus commissions). In our example, the maximum loss would be ($21.35 - 14.60) X 100 = $675 (plus commissions).

This maximum loss of $675 could easily be realized if the position is held to expiry and both AVGO puts expire worthless. Both puts will expire worthless if the Broadcom share price at expiration is above the strike price of the long put (higher strike), which is $480 at this point.

This trades potential profit is limited to the difference between the strike prices (i.e, ($480.00 - $460.00) X 100) minus the net cost of the spread (i.e., $675) plus commissions.

In our example, the difference between the strike prices is $2,000. Therefore, the profit potential is $2,000 - $675 = $1,325.

This trade would break even at $473.25 on the day of the expiry (excluding brokerage commissions).

Bottom Line

Investors with a two- to three-year horizon are likely to see significant returns from chip heavyweight AVGO stock. However, there could be short-term profit-taking in AVGO stock in the coming weeks, especially if the broader semiconductor sector comes under pressure.

3 Ways To Trade Chip Heavyweight Broadcom With The Stock Near All-Time Highs
 

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3 Ways To Trade Chip Heavyweight Broadcom With The Stock Near All-Time Highs

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