If you’re looking for leadership in the tech sector, look no further than the new-and-improved Broadcom Ltd (AVGO).
Following a recently completed $37 billion merger between Avago Technologies and Broadcom, AVGO stock is a stronger, diversified technology outfit that stands to benefit shareholders with more reliable earnings streams and increased growth prospects.
Broadcom relies fairly heavily on Apple (AAPL) with roughly 25% of each company’s revenues in 2014 attributed to the tech giant. But the newly merged entity is in position to continue growing and differentiating its business beyond Apple.
Outside its wireless chip business, Broadcom has exposure to the Internet of Things, enterprise storage and wireless infrastructure — markets that should improve AVGO stock’s bottom line.
In fact, the Street is anticipating substantial sales growth the next couple years for Broadcom. And with an immediately accretive deal and $750 million in annual cost synergies over the next 18 months, AVGO is forecasted to have very attractive earnings growth of 18% for the next five years.
And by this strategist’s own estimates, that fundamentally solid bottom line makes the “top line” on Broadcom’s price chart look all the more compelling. Let me explain.
AVGO Stock Daily Chart
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A failed breakout from a weekly base last summer in Broadcom ultimately turned into a rather lengthy and constructive nine month, base-on-base pattern for AVGO stock.
As labeled, Broadcom’s base-on-base is the culmination of 2016’s current high level, double-bottom, which followed a larger cup base with handle carved out during the second half of 2015.
The net result has been a technical cleansing of Broadcom shares. At the same time, the price action in AVGO stock has built a solid technical platform for a healthier breakout through its “top line” of $150.50 from last June.
Broadcom Long Bull Call Vertical
In reviewing the Broadcom options board, the July $160/$175 bull call spread for up to $5 is attractive upon a breakout through AVGO stock’s pattern high of $150.50.
Currently this spread is priced at $4.30 mid-market, but given its initial delta of about 20 and liquidity in AVGO, $5 is the estimated price for this limited risk vertical.
The out-of-the-money vertical requires a move of about 10% in AVGO stock beyond the breakout price in order to breakeven at expiration. And to capture the 200% return, or $10 max profit, a fairly strong 16% gain would be needed.
The upside of the vertical is there’s plenty of calendar time for this type of move to occur. In our view, that’s especially true for a growth stock like Broadcom, which boasts a strong combined fundamental and technical picture.
Of course, and for traders’ own bottom lines should AVGO stock falter following a breakout, the Broadcom vertical’s reduced risk characteristics coupled with money management are definitely benefits worth appreciating when keeping limited losses even smaller.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT
