The bullish relative price action of semiconductor manufacturer Broadcom (BRCM) caught my attention for a potential long-side trade.
The company reported fourth-quarter results last week, which beat on both the top and bottom lines. Revenue came in at $2.06 billion versus an estimated $2.02 billion, and earnings per share (EPS) of $0.60 handily beat the Zacks consensus estimate of $0.38.
Despite the beat, sales for the quarter were lower by 1% on a year-over-year basis. And the company's forecast of $1.9 billion to $2 billion in revenue for the first quarter of 2014 was below the consensus $1.97 billion.
Broadcom's connectivity chips are widely used in higher-end smartphones, including the Apple (AAPL) iPhone. After Apple's weak revenue guidance during its post-earnings conference call last week, some investors became concerned that this would have negative consequences for suppliers like Broadcom. Also, Broadcom's connectivity chips aren't as widely used in the lower-end smartphones, where growth has picked up. But Broadcom did not imply that it anticipates any major issues in terms of sales for its connectivity chips.
The company also said its board of directors approved a 9% dividend increase to $0.48 annually, for a current yield of 1.6%.
On the back of the news, a Stifel Nicolaus analyst reiterated his buy rating and raised his price target to $34 from $32.
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BRCM apparently passed the earnings test, with the stock rallying 2% on Jan. 31 despite a broader market sell-off.
Looking at the nine-year chart clearly shows the ebbs and flows of the industry. While the semiconductor business can be a lucrative one, stocks in this sector regularly get hit with bouts of serious volatility.
While off-putting to some investors, this volatility provides great opportunities for traders. For my part, I see BRCM as a stock that respects its various support and resistance levels, and thus, offers plenty of swing trading opportunities.
In terms of the bigger picture, the marginal lower high in 2011 (a double-top) set the bearish tone for the next few years. But it increasingly looks like the August 2013 lows were an important inflection point.
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After BRCM fell out of a big wedge pattern in July of last year, it quickly managed to get back on its feet and has since formed a solid bottom from which it could move higher.
A move back below the $27 area could mean renewed trouble for the stock. For the time being, though, BRCM is doing one very important thing: showing relative outperformance versus many of its peers and the broader stock market.