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Broadcom: Pop Or Drop After Earnings?

|About: Broadcom Inc. (AVGO)

I think it pops.

Despite our Sell signal.

Despite our low Implied Return calculation.

Despite its failure to qualify for our model portfolio.

Our Sell signal for Broadcom (NASDAQ:AVGO) has improved dramatically in the last 20 days . It’s rated a 47 out of 100, a Sell signal, where reaching 51 would make it a weak Hold signal. Our Demand Signal has showed green for the last week, which is a positive. One analyst just raised the 12-month target to $330 and that is usually bullish, especially just before earnings.

Our signals reflect what the market expects. They are not, necessarily, predictive. Our signals and the market can be surprised by earnings. When that happens, the market quickly changes its view. Likewise our signals quickly change, if they were wrong. Indications from our Demand Signal and our most important signal, the overall fundamental/technical grade, show improvement just before earnings. That leads us to expect good earnings. That will move our grade from a Sell signal to a Hold signal. I doubt it will jump to a buy signal. 

To make it into our dividend model portfolio, AVGO needs a strong Hold signal, not a weak one. Further, our total return calculation, that includes the fat dividend, needs to move above 10%. That could happen if the earnings guidance is really good. That would be a surprise to our signals.

EarningsWhispers is looking for $5.30, well above consensus of $5.13 on $5.5 billion in revenues. Unfortunately, Yahoo shows the earnings estimate of $5.73 dropping to $5.13 over the last 90 days and the 2019 earnings dropping from $23.05 to $21.38. Next year’s estimate has dropped from $26.34 to $23.55. Obviously, guidance needs to reverse these trends.

Finally, the market rotation into low PE stocks with great dividends may be the reason for AVGO improving recently, despite the drop in earnings estimates. Obviously it is easier for AVGO to beat $5.13 rather than the $5.73 of 90 days ago. (Also the short ratio indicates this is not a favorite short.)

Here is the chart with the signals we like to watch and they don’t look bearish:

Avgo eps

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in AVGO over the next 72 hours.

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