Chip Stocks To Watch: Broadcom Stands Out On Earnings Strength And Is An IBD 50 Stock To Watch

Chip stocks have had their demand and supply issues of late, but Broadcom (AVGO) stands out from the pack for its long-term steady earnings growth and its rising relative strength line. That’s why it’s an IBD 50 Stocks to Watch pick and a new member of the growth screen.


Broadcom is forming a cup-with-handle base with a buy point of 645.41. The stock advanced 4% Tuesday afternoon as the semiconductor industry rose.

The handle is a bit deeper than normal, but given the market correction it may be acceptable. Much of the base has formed below the 50-day moving average, which is not ideal. But the chip stock is still holding above its 200-day moving average.

The relative strength line has been rising consistently for the past month and is at new highs, according to MarketSmith.

Broadcom Is A Leader Among Chip Stocks

“Despite the solid results and optimistic tone, overall investor sentiment seems to lean toward apathy (with concerns around a cyclical peak still on their mind),” Deutsche Bank analyst Ross Seymore said in a note to clients on May 6. However, management commentary has been mostly positive on demand and supply at semiconductor companies, Seymore said.

Meanwhile, investors remain concerned about macroeconomic issues such as inflation, the possibility of a recession, geopolitical uncertainty and industry-specific concerns. Those concerns include weakening PC and smartphone sales, Covid-related automotive shutdowns in China, and consumer pessimism.

Among chip stocks, Seymore recommends Broadcom for its steady growth.

Broadcom is scheduled to release results for its fiscal second quarter ending April 30 on June 2. FactSet’s consensus shows analysts expect it to report earnings of $8.71 a share on sales of $7.9 billion. For the year, analysts expect earnings of $35.60 on sales of $32 billion.

Stable Earnings Make Broadcom Stock Stand Out

If history serves as a guide, analysts won’t be disappointed. Broadcom has a three-year EPS growth rate of 11%, and last quarter it reported 27% growth from the same period a year ago, according to IBD Stock Checkup.

Broadcom is ranked No. 2 in IBD’s fabless chip industry group, behind Monolithic Power Systems (MPWR). Broadcom has a solid 91 on all three of its IBD ratings: Composite, EPS and Relative Strength.

But investors cannot escape market risk, which is high right now as indexes go through a correction. It may be smart to keep AVGO on a watchlist until the market improves.

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