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Broadcom Corp. (BRCM) And Semiconductors Ready To Outperform?

 January 03, 2013 03:55 PM

(By Rich Bieglmeier) Semiconductor stocks made iStock's emerging bull list forthe second week in a row. As you can see on the chart below, the sector is bouncing off of multi-year lows relative to the S&P 500. As a group, we can see the index continuing their rally the days and weeks ahead.

The sector followed a very similar pattern in late 2008. Semis bottomed and were accompanied by a bullish MACD crossover below zero. The sector continued to march higher for two-years, ending their ascent in early 2011.

[Related -Broadcom Corporation (NASDAQ:BRCM): Solid Core Biz, LTE Progress Could Aid 2014 Results]

iStock examined the stock charts for many of the constituents within our bullish sectors, at least those worth reviewing. Unfortunately, most stocks have gapped up; leaving their backsides exposed, and reached the upper limits of relative strength. In other words, it could be hard for market and stocks to head too much higher before some profit-taking. At the very minimum, some sideways trading might in store.

With that in mind, iStock was on the lookout for semiconductor stocks with attractive entry points if a minor pullback is in Wall Street's future. Broadcom Corp. (BRCM) fits the description nicely. The designer and developer of semiconductor solutions for wired and wireless communications' stock exploded out of the topside of a descending triangle. The move catapulted shares above the semi's 200-day average and off the 50-day, which is below the 200-day. By relative strength, the price isn't stretched out yet, but based on 20-day volatility and BRCM's 20-day moving average; the stock price could regress towards $33.50, which is the neighborhood of where we think a nice entry point exists.

[Related -Is Intel (INTC) About To Buy One Of These Companies?]

It marks support at the top of the triangle breakout and retraces of the gap up. While "backfilling" the entire gap may not happen, a pullback to Wednesday's low of $33.90 is likely, and that's where traders might think about entering BRCM shares. The base of support could provide a short-term springboard to $37ish.

Longer-term, based on BRCM's historical price-to-earnings valuations, the NASDAQ 100 member might offer investors decent value. Analysts believe earnings will grow by 2.8% in fiscal 2013, but pick up to 12.53% in the next 3-to-5-years. Wall Street is pricing in a forward P/E of 11.7, which is well below the 5-year trailing 12 month P/E of 17.79. If shares traded at 17.79 times 2013's estimate of $2.98, BRCM would rise to $53 – 52% upside. However, a lot of the move could come later in 2013 as eps estimates increase to meet 3-5 year, projected growth rates.

Overall, semiconductors have the look of outperformance in the days and weeks, and possibly years ahead. Broadcom Corp. (BRCM) and others will be beneficiaries of a rising tide for all semi ships. BRCM could offer traders a short-term opportunity and longer-term shareholders might find the semiconductor's price to be right.


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