Broadcom Traders Bet Stock Will Fall 12% Further

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Broadcom Traders Bet Stock Will Fall 12% Further

(Please keep in mind that the author of this fundamental study is also a financial writer and portfolio manager.)

Many investors were taken aback by BroadcomInc(AVGO) .’s recent purchase of CA Inc. (CA) for $18.9 billion, and Broadcom’s shares suffered as a consequence. Its stock has dropped by more than 16% since June 11, and the bad news is that traders believe it will go considerably more, probably another 12% by the middle of August, from its present price of about $208.

Broadcom’s acquisition of CA comes after the company was unable to purchase Qualcomm Inc. (QCOM) earlier this year. The news of the proposed transaction took many investors off stride, considering Broadcom’s (a chipmaker) and CA’s (a software firm) very different businesses. Broadcom’s stock has underperformed over the last year, with shares currently down by more than 15% against a 15% increase in the S&P 500.

AVGO data by YCharts

Bearish Bets

Options traders believe the stock’s dramatic drops are not ended, and that there will be more before the expiry date of August 17. The long straddle options strategy predicts that Broadcom shares will grow or fall by almost 8% from the $210 strike price. However, with over 3,000 active put options, the amount of bets on the stock falling outnumbers bets on the price increasing by almost 2 to 1. The stock is now trading in a range of $194 to $226. The number of open puts at the $200 strike price is approaching 5,000, and with the contracts selling at $4.50, the stock would need to decline by almost 7% for a buyer of those options to break even.

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Based on activity at the $185 strike price for expiry on August 17, some traders believe the stock will go even lower, to about $183.50, a decline of almost 12% from its present price.

Slowing Growth

Broadcom’s stock performance comes as the company’s profits growth slows in fiscal 2019. Analysts predict that sales growth will drop to 3% in 2019, down from 17.6% this year. Meanwhile, profit growth in 2019 is expected to be just 3.5%.

AVGO Annual EPS Estimates data by YCharts

Cheap Valuation May Not Help

One plus is that the company is now selling at its lowest one-year forward P/E ratio in over a year, at just 10.2. With the current purchase, though, that low value may not be helpful as investors attempt to figure out how CA will be merged into Broadcom’s existing company.

AVGO PE Ratio (Forward 1y) data by YCharts

For the time being, there seem to be more questions than answers surrounding Broadcom’s latest purchase. Broadcom’s shares may continue to suffer short-term losses in a sell-first, ask-questions-later stock market. At least, it is what some traders believe will occur.

Michael Kramer is the originator and manager of the actively managed, long-only Thematic Growth Portfolio at Mott Capital Management LLC, a registered investment advisor. Kramer normally purchases and keeps equities for three to five years. Click here to see Kramer’s profile and portfolio holdings. The information offered is only for educational purposes and does not constitute an offer or solicitation to sell or buy any particular stocks, assets, or financial strategies. Unless otherwise specified, investments involve risk and are not guaranteed. Before adopting any of the strategies outlined here, contact with a knowledgeable financial advisor and/or tax expert. The adviser will offer a list of all suggestions made in the previous twelve months upon request. Past performance does not predict future performance.

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