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Another Look: 6 Hours Only

|About: Broadcom Limited (AVGO), Includes: CA
Summary

Below is a sample trade alert that was sent out to subscribers of BAD BEAT Investing last week.

This trade has returned just under 10% in a week, and is only going higher.

For the next 6 hours you can join at ~60% off the usual rate if you sign on for an annual membership.

Below is a sample trade alert that was sent out to subscribers of BAD BEAT Investing last week, which has returned over 10% in a week. This is what we do in this service. For the next 6 hours you can join at ~60% off the usual rate if you sign on for an annual membership (20% off a 46% discount!!!). ~$1 a day. We are the fastest growing service in the Marketplace and were the top performing service of April and May, and are on pace to take that title again in July.

The Trade

Broadcom (AVGO) was screened by us this morning and became a topic in chat (thank you to user Hent00, and to our staff member Tara who had flagged this morning as one to screen). We wanted to bring it to your attention as it looks set to recover some for a RAPID RETURN trade here guys. This is a conviction buy. Take a look at the recent downgrades:

Analysts

Evercore ISI downgrades Broadcom (NASDAQ:AVGO) from Outperform to Inline with a $275 price target, a 13% upside to yesterday’s close.

RBC downgrades Broadcom from Top Pick to Outperform and lowers the price target from $330 to $300.

The downgrades follow Broadcom’s $18.9B buyout offer for CA. In fact the stock is down more than 17% at the open of trade today following its announcement that it will be acquiring CA Technologies, Inc. (CA) for $18.9 billion in cash. CA’s shareholders will receive $44.50 per share in this deal, representing a premium of approximately 20% from its closing price yesterday, and this transaction is expected to close in the fourth quarter of this year.

Here is the thing. Even with all of these downgrades the lowest price target still is a 25% gain from present levels. We think you can get in and make a quick 10-15%. 

The Chart Speaks Volumes

The stock is in a defined BAD BEAT zone.

The play

Current price $202.90

Target entry <$203

Target exit $220+

Stop loss: $193

Catalyst for pain

The purchase of CA technologies is is expected to drive Broadcom's long-term Adjusted EBITDA margins above 55% and be immediately accretive to Broadcom's non-GAAP EPS. On a combined basis, Broadcom expects to have last twelve months non-GAAP revenues of approximately $23.9 billion and last twelve months non-GAAP Adjusted EBITDA of approximately $11.6 billion.

The Street is not happy about the price, or the direction the company may be heading by buying up this software company. Broadcom on the other hand is a semiconductor company that has mainly grown by acquiring companies in the same industry and then trimming them down to maximize efficiencies. There isn’t much in its past to suggest that it would head into software next. So investors are understandably concerned about how this integration will go and also, whether the company will succeed in its diversification .

Why its positive and why you need to get long here

The fact is that semiconductor acquisition deals of the kind Broadcom pursues are getting harder and harder to come by because of the significant amount of consolidation the industry has already seen. The current deals on the stage are very high-profile, intended to capture product roadmaps and including a higher element of risk. The payback period is also relatively more uncertain.

Let us not forget that software is the future. Even hardware companies generally have software integration units, but the way technology is advancing, software opportunities are opening up in every sphere of life as individuals, companies and other entities are all increasingly turning to the cloud with always-connected devices to store, process and retrieve their information that is then used in everyday decision making. For an acquisitive technology company to completely pass up this opportunity may not be such a good idea. CA’s mainframe business is likely to generate a steady flow of revenues with better visibility. The infrastructure market is big and expanding, so there’s room for multiple players to grow. Augmenting with other deals in the space could help Broadcom become an important player.

As far as shares are concerned here at $203 we have value. However the stock is well below 10 on a p/e basis and 8 on a forward p/e basis. It is cheap.

Before the deal, the stock also has faced some tariff/trade war related selling in recent weeks, but we think the name has a nice bounce coming.

Conclusion

This is a conviction trade, make the purchase.

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Disclosure: I am/we are long AVGO.