Monday, December 19, 2011

AVGO: Analog in a Digital World

Avago Technologies Ltd. (AVGO) is a Singapore-based maker of analog semi-conductor products.

Analog? The very word seems so 1960s. Like popping a 45 on your record player. Good gracious, great balls of fire!

It is, of course, still an analog world, at least at the macro level. And AVGO's products provide interfaces between analog reality and our digital servants.

So AVGO isn't really so retro, and it has a mildly interesting story. But it also has a mildly bearish chart, despite having been added to the Nasdaq 100 on Dec. 12, and in this case, the chart will be my guide.

AVGO hit an all-time high of $39.45 in early July, and has since done a single zag-zig-zag in decline. It's now on the second zag, and the question is whether it will break through to a lower low -- something below $26.42. down 4% from present prices.

There is, however, an important point on the chart that argues against the bearish case: Volume.

The past five weeks, ending last Friday, the price has declined in three of them and risen in two, analyzing the intra-week price movement rather than comparing close to close.

Volume during the two up weeks was more than double the highest-volume down week, which carried the price down 13%.

There's not a lot of conviction behind the selling waves, making the bear case thoroughly ambiguous.

Given AVGO's fundamentals, the nervous bearishness comes as no surprise. Return on equity is an astounding 36%, and the company has no debt to speak of. Instituional ownership stands at 87%, alongside the bluest of blue chips.

On the other hand, the price is three times sales, a very expensive level that suggests, to me, that the money that's going to flood in has already done so.

Analyst consensus is center on the second rank, which isn't exactly bearish but not strongly bullish. And earnings forecasts suggest it would be a stock to sell.

So here as well, there is some ambiguity. Given the 4% drop before the price hits near-term support, I would call AVGO a reasonable near-term play, but I wouldn't consider it a candidate for a longer-term bearish positions.

Bottom Line: I opened a bear position on AVGO today.

No comments:

Post a Comment