Broadcom stocks have had a strong year, seeing a record high on Aug. 30.
With a 2.9% dividend yield, chip heavyweight stocks also appeal to passive income seekers.
Potential buy-and-hold investors might consider a short-term drop to $470 as a better entry point.
Semiconductor investors have so far delivered solid returns from Broadcom (NASDAQ:) in 2021. AVGO shares, which are up nearly 14% since the start of the year (YTD), hit an all-time high (ATH) of $ 507.85 on August 30. On September 10, the stock closed at $498.15.
The 52-week range for stocks was $343.48 – $507.85, while the company's market capitalization (cap) is $204.3 billion. The current price level supports a dividend yield of 2.9%. That's why many income-oriented tech investors follow the stock closely.
On September 2, Broadcom released statistics for fiscal year 2021, ending August 1. Revenue of nearly $6.78 billion was up 16% year-over-year (YOY). Non-GAAP diluted EPS was $6.96.
CEO Hock Tan said of the results:
"Broadcom delivered record sales in the third quarter, reflecting our product and technology leadership in multiple secular growth markets in cloud, 5G infrastructure, broadband and wireless."
Management's fourth quarter revenue forecast was $7.35 billion, up 14% from the same period last year. AVGO's fiscal fourth quarter ends October 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 emphasizes:
"99.9% of all Internet traffic crosses at least one Broadcom chip."
In other words, for long-term investors in technology, AVGO stocks have a lot to offer.
What to expect from AVGO Inventory
Of the 30 analysts surveyed via Investing.com said Broadcom's stock has an " "outperform" rating.
Chart: Investing.com
The stock has a price target of $538.36 for 12 months, which represents a return of approximately 8% from current levels. In other words, the street expects a modest price increase. The 12 month price range is currently between $198 and $600.
The lagging P/E, P/S and P/B ratios for Broadcom stocks stand at 36.9x, 7.73x and 8.43x, respectively. For 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:), Intel (NASDAQ:), NVIDIA (NASDAQ:), and Texas Instruments (NASDAQ: ).
Chip Stock Majors Comparative Proportions
As these statistics show, investors have rewarded chip stocks differently so far in 2021. Therefore, such valuation ratios alone are not sufficient to decide the long-term growth potential for widely followed technology names.
Investors looking at technical charts may be interested in the fact that some of AVGO's short-term oscillators are overbought. While they may last for weeks, if not months, there may also be potential profit-taking lurking.
If broader technology stocks came under pressure during the rest of the month or in October, we could potentially see AVG shares fall to $470. If the stock doesn't find support at that level, it could bring AVGO to $450 next leg, after which it can trade sideways as it establishes a new base.
Finally, as part of the near-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 view of possible movements in a security. However, this statistic does not predict the direction of movement.
The current implied volatility of AVGO is 22.8, which is below the 20-day moving average of 36.3. This means that the implied volatility is on a downward trend. While the current IV level could change, the market doesn't appear to be expecting extreme jerkiness in the stock for now.
Our expectation is that the stock price will mainly fluctuate between $470 and $500, especially during the rest of September and possibly early October. A possible drop towards $470 would provide a better entry point for new AVGO investors.
As a respected dividend game in the technology sector, any potential decline in the stock will likely be short-lived. By the end of the year, we could potentially see a new lead build in Broadcom stock that would eventually lead to a new ATH.
3 Possible transactions
1. Buy AVGO shares at current levels
Investors who are not concerned with daily price movements and who believe in the company's long-term potential should consider investing in Broadcom shares now.
On September 10, AVGO shares closed at $498.15. Buy-and-hold investors should expect to hold on to this long position for several months as the stock attempts another attempt to hit the all-time high of $507.85 and then move toward $538.36, analysts' consensus estimate. Such a step would lead to a return of about 8%.
We should remind readers that a number of brokers allow retail investors to buy fractional shares, allowing them to allocate smaller amounts to companies with high share prices.
In the meantime, investors concerned about large declines may also want to 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 don't want to invest capital in AVGO stock, but still want significant exposure to the stocks might consider investigating a fund that the company holds as a top holding company.
Examples of such ETFs include:
First Trust NASDAQ Technology Dividend Index Fund (NASDAQ:): This fund is up 18.1% YTD and AVGO' s weighting in the ETF is 8.11%;
Invesco PHLX Semiconductor ETF (NASDAQ:): This new fund is up 7.1% since its inception in June, and the weight of AVGO stock is 7.88%;
Schwab US Dividend Equity ETF (NYSE:): The fund is up 18.5% YTD and the weight of AVGO is 4.28%.
3. Bear Put Spread
Readers who believe that AVGO stocks can make short-term gains should consider embarking on a bearput spread strategy. However, as options are involved, this setup is not suitable for all investors. The position should also be checked.
Still, this trading setup could be attractive to long-term Broadcom investors who could use it in conjunction with their long stock ownership. Such a bear put spread would provide some near-term protection against a price decline 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 have the same expiration date.
Such a bear put spread would be established for a net debit (or net expense). It will benefit if Broadcom shares fall in price.
For example, the trader can buy an out-of-the-money (OTM) put option, such as the AVGO Dec.17 480 strike put option. This option is currently offered for $21.35. So 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 price, such as the AVGO Dec.17 460 strike put option. This option is currently offered for $14.60. Thus, the trader would receive $1,460 to sell this put option, which also expires in just 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 can be easily realized if the position is held until expiration and both AVGO puts expire worthless. Both puts expire worthless if the Broadcom stock price is higher than the strike price of the long put (higher strike price), which is currently $480, at expiration.
The potential profit from this trade is limited to the difference between the strike prices (ie ($480.00 – $460.00) X 100) minus the net cost of the spread (ie $675) plus commissions.
In our example, the difference between the strike prices is $2,000. Therefore, the earning potential is $2,000 – $675 = $1,325.
This trade would break even at $473.25 on the day of expiration (excluding brokerage commissions).
Bottom Line
Investors with a two- to three-year horizon are likely to see significant returns on the chip-heavyweight AVGO stock. However, there could be short-term gains in AVGO stocks in the coming weeks, especially if the broader semiconductor industry comes under pressure.
