Most analysts are in agreement (36 Buys, 7 Holds and 2 Sells) that QCOM’s positioning for both legacy, existing technologies and next gen chips for mobile devices is envied by all of its competitors both big and small. Since gapping down 3.5% from 14 year highs on April 24th following the company’s mixed fQ2 report and meh guidance it has filled in the gap but has failed to make a new high with the SPX. A couple weeks ago we took a look at the stock’s technical set up as it approached a full gap fill, and concluded:
the gap fill and fail action in the stock over the last 2 days does not look constructive from my vantage point. We missed the bearish entry yesterday, but have our eye on it. My hunch is that if QCOM breaks the $76.77 earnings intraday low in the coming weeks, it likely has a date with the rising 200 day moving average, currently around $72.75.
The stock didn’t break that level and has gone higher since then.
Checking back in on the stock today, the one year chart (below) shows today’s weak relative strength and what appears to be a test of its 50 day moving average (purple), which for all intents and purposes it has hugged on the way up from the July 2013 lows:[caption id="attachment_41268" align="aligncenter" width="600"] QCOM 1yr chart from Bloomberg[/caption]
The technical set up now seems fairly decent though, and by no means does it scream SHORT, despite its failure to make a new high. What it has done is outperform the broad market handily up 7.5% this year, but lagging the SOX which is up 14%.
Some investors took issue with the mixed results in f Q2 and slightly soft guidance for fQ3. But there are few large cap tech stocks that pay a 2% plus dividend yield, have multiple billion dollar active share repurchase, have more than 20% of their market cap in net cash on the balance sheet, and trade at a PE/G (PE to Growth Rate) of about 1 (trades 15x this years earnings expected to grow 15%). For instance while INTC has a 3.25% div yield, massive buyback, 10% net cash, and also trades at about 14/15x this years expected earnings, the stock has NO expected earnings growth this year.
If QCOM can hold trend and economic data both here and abroad comes in better than expected, the idea of playing for a breakout looks fairly attractive, rather than a breakdown to support in the mid $70s. But that breakout is unlikely to happen soon as evidenced by today’s action.
The company has confirmed its fiscal Q3 earnings date of July 23rd which falls in Aug expiration. If I were inclined to play for a breakout to new highs with better than expected outlook into a seasonally strong period I would look to finance that view in the near term by selling premium near the recent highs:
Trade: QCOM ($79.75) Buy to Open July / Aug 82.50 call spread for .85
-Sell to open July 82.50 call at .54
-Buy to open Aug 82.50 call for 1.39
Break-Even on July expiration:
-Profits are maximized at 82.50 on July expiration. Slight moves above and below that strike are also profitable with big moves higher or lower putting the structure at risk of losses on expiration.
-Max risk is 85 cents
Previous Post May 15th, 2014: Chart of the Day – QCOM: Minding the Gap
Dan had a nice trade in QCOM in April ahead of its earnings report, with the following rationale for a slightly bearish trade:
My View: With the stock back at levels not seen since 1999, and what appears to be VERY positive sentiment on the stock, evidenced by analysts ratings, low short interest, the relative low levels of implied volatility and the fairly tight spread btwn IV and realized vol, I am inclined to think it would take a massive beat and raise to get the stock to break out in a meaningful way. But as I said above, the stock trades at a very reasonable valuation relative to EXPECTED growth, 23% of their market cap in cash, no debt, they pay a dividend that yields a little over 2%, and are extremely well managed. There is a lot to like.
All that being said there is a lot of good news priced in a current levels, and I want to make a defined risk (slightly) bearish play that the stock pulls back to recent support following tonight’s report.
He took it off for a double the following day as QCOM went right to the 77 strike of the put calendar.
In any case, we’ve been watching the stock’s price action ever since that weak earnings reaction. Yesterday, the stock filled in the earnings gap at $80.71, only to sell off into the close. The stock is selling off more aggressively today, and is back below $80:
The 50, 100, and 200 day moving averages are all still comfortably upward sloping, so QCOM has shown much better relative strength compared to most tech stocks over the past couple of months. Even the decline on earnings closed right at the 50 day ma, and the stock hasn’t touched its 100 or 200 day ma’s since July.
Nonetheless, the gap fill and fail action in the stock over the last 2 days does not look constructive from my vantage point. We missed the bearish entry yesterday, but have our eye on it. My hunch is that if QCOM breaks the $76.77 earnings intraday low in the coming weeks, it likely has a date with the rising 200 day moving average, currently around $72.75.