No growth means no reason to go up

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No growth means no reason to go up

Bobby Raines 10/21/2013

Now that the debt ceiling disaster has been averted and the government reopened, investors can turn their attention back to earnings season. Results so far have been mixed, with some big misses like IBM, and some mixed reports that were less than impressive like Goldman Sachs.

This week a number of semiconductor stocks, particularly those in the mobile industry, are reporting earnings. As the market for smartphones has matured, the outlook for stocks in this sector has changed somewhat. It once seemed like companies making mobile hardware could do no wrong, but that has changed as sales have slowed. Witness the divergent fortunes of Qualcomm ( QCOM ) and Broadcom ( BRCM ), both companies make chips used in mobile phones, but Qualcomm's stock is up this year while Broadcom's is not.

Most of the difference in year-to-date performance comes from what happened after the companies reported second-quarter earnings. Both met or exceeded analysts' estimates when adjusted for one-time items, but Broadcom's quarterly report also included a $501 million one-time impairment charge related to the company's acquisition of Netlogic.

Investors generally are relatively quick to forgive a one-time expense or two, but Broadcom's impairment came alongside an estimate for third-quarter revenue that was below expectations. Analysts had been forecasting third-quarter revenue between $2.104 billion and $2.245 billion. The company provided a range of $2.05 billion and $2.20 billion, which disappointed investors and lead a number of analysts to downgrade the stock.

The outlook for third quarter earnings is understandably less rosy. Analysts, on average expect the company to earn 69 cents per share on $2.13 billion in revenue. That 69 cents is less than the 70 cents the company reported in the June quarter and also down from the 76 cents Broadcom reported for 2012's third quarter. The company could exceed estimates, but is there any reason the stock should go up if earnings aren't growing?

That lack of growth is the problem at Broadcom in a nutshell. The company has a market-leading position in sales of chips that combine 4G and Wi-Fi technology, but Qualcomm is making inroads in that market and Texas Instruments ( TXN ) recently signed a contract with a large customer that is believed to be Apple ( AAPL ).

For a stock like Broadcom, where the company doesn't have any real growth prospects in the near term, Consider using a bear-call credit spread. The November 29/32 bear-call spread currently yields a credit of about 28 cents. That's a 10.29% return, or 150.29% on an annualized basis (for comparison purposes only. This position will return a full profit so long as the stock is below $29 at November expiration. That gives this position 7.3% downside protection.



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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Originally published on InvestorsObserver.com


This article appears in: Investing , Options

Referenced Stocks: AAPL , BRCM , QCOM , TXN

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