Wait for Volatility to Subside Before Buying Broadcom Ltd Stock

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Broadcom stock - Wait for Volatility to Subside Before Buying Broadcom Ltd Stock

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I have to thank Broadcom Ltd (NASDAQ:AVGO). In August of last year, I discussed the contrarian opportunity in Qualcomm, Inc. (NASDAQ:QCOM). At the time, QCOM was under heavy pressure, but I maintained that the selloff was excessive. But out of nowhere, Broadcom’s takeover bid for Qualcomm drove up sentiment for both Broadcom stock and its target.

That being said, I wanted a responsible move higher for QCOM, not a slingshot like we witnessed.

Furthermore, the bullish thesis almost exclusively centered on Broadcom’s accusatory aggressiveness. Several analysts were pushing the argument. I even stated that the markets were suffering “takeover madness.” I have several reasons why I don’t like gambling largely on a single news item, primarily that you never know what’s going to happen next.

When the new year rolled around, I still maintained that gambling on the takeover was risky, despite consensus saying otherwise. If it didn’t happen, several, perhaps most investors would be disappointed and would proceed to sell out. The markets would punish QCOM, surely, but they’d also take Broadcom stock to task.

Guess what? To loosely paraphrase President Trump, the best dealmaker in the history of deal-making stepped in and quashed the biggest deal in the history of the technology industry. In doing so, both AVGO and QCOM look ugly.

I’m not here to rehash old news but rather to remind people what got us into this mess. Furthermore, it’s always important to reconsider an investment whose catalyst is a high-variable merger. Again, you just don’t know what will happen.

Another Contrarian Opportunity in Broadcom Stock?

We’re now in the opposite situation compared to where we were late last year. We no longer have “sure things.” Instead, we have open-ended questions about the company’s trajectory. But could this be a fresh contrarian opportunity for Broadcom stock?

Our own Will Healy listed out the potential “bull case 2.0” in his write-up a few days ago. While not sealing the QCOM deal hurts, Broadcom now has several options.

Healy mentioned that management was willing to pay $117 billion for Qualcomm. That leaves several strong companies on the table, including Micron Technology, Inc. (NASDAQ:MU), Xilinx, Inc. (NASDAQ:XLNX), Analog Devices, Inc. (NASDAQ:ADI) and Maxim Integrated Products Inc. (NASDAQ:MXIM).

Essentially, investors can now purchase Broadcom stock with a stronger balance sheet and healthier prospects. I don’t disagree with Healy’s logic. At the same time, investors should consider why the Qualcomm deal cratered.

President Trump ran on a populist message to win the White House, and he has largely maintained that position. According to The New York Times, Trump pulled the plug because the QCOM deal raised national security concerns. But just as importantly, he wasn’t going to let a “foreign-ish” company with possible ties to China take over an American stalwart.

With the North Korea crisis, the Trump administration has few good options. The options that do exist the White House will take advantage of vigorously. With China being the critical factor in determining a peaceful outcome in North Korea, Trump has to show he means business.

The President imposed severe tariffs on imported steel and aluminum, a not-so-subtle dig at China. The quashed QCOM deal falls under the same category. Here’s the message: rein in North Korea, don’t mess with us, or else face the consequences.

We can expect more tough actions, making Broadcom stock an unfavorable investment.

Leave Broadcom on the Shelf

If the QCOM deal was nixed due to typical competitive concerns, I’d give Broadcom stock another chance. But when you look at the broader geopolitical context, I’d rather consider less Trump-vulnerable options.

Whatever you think about the President, we can all agree he wants things done his way or the highway. That kind of thinking buoyed the American working class and the organizations that hire them. However, when you’re dealing with multinational affairs such as technology, things are more nuanced.

I don’t know President Trump personally, but I don’t think nuance is his key strength.

What I do know is that we’re in unprecedented territory, which sparks substantial volatility. Given that so many analysts thought that Broadcom stock and QCOM were sure bets, I’m hesitant on pulling the trigger. Let the volatility ride out, wait for some stable price action, and then reconsider Broadcom.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2018/03/wait-for-volatility-to-subside-before-buying-broadcom-stock/.

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