Investors who are looking for new opportunities in the stock market ought to pay attention now.
Irrespective of your like or dislike for President Trump, you have to give him credit for being the first U.S. president to take aggressive steps to stop China from dominating new technologies essentially by acquiring American technologies.
And there’s evidence that Trump is succeeding. Let’s examine the issue with a chart.
Read: Broadcom deal to buy CA makes little sense on the surface
Please click here for an annotated chart of Broadcom AVGO, -1.12% Please observe the following from the chart:
• At the low, the stock was down by $45.98.
• There is a big gap down in the stock.
• The gap down is significantly below the prior strong support, as shown on the chart.
• When the gap down occurs significantly below the prior strong support, it is considered very negative.
• The gap down is on heavy volume.
• Heavy volume often means there may not be much further downside.
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Broadcom is a major semiconductor company that has Chinese connections. The company has used the roll-up model with much success. In a roll-up model, the company grows by buying other companies in the same business. The last major successful semiconductor buyout by Avago Technologies was a major American semiconductor company, Broadcom AVGO, -1.12% If Trump had his way, he probably would not have approved that buyout. Subsequently, Avago kept its ticker symbol “AVGO” but changed its name to Broadcom.
Then Broadcom tried to buy Qualcomm QCOM, +0.14% Qualcomm’s technology is in most smartphones. Qualcomm is a jewel of U.S. technology.
At that time, Broadcom was domiciled in Singapore. For this reason, the buyout proposal came under national security review. To help with the national security review, Broadcom changed its domicile to the U.S. And Broadcom’s CEO had his picture taken with Trump. However, that did not help. The Trump administration rejected the buyout on account of close ties between Broadcom and China.
Qualcomm is in the process of buying Dutch semiconductor company NXP Semiconductors NXPI, -1.30% The attraction of NXP is that it makes semiconductors for automotive, security and the internet of things (IoT). IoT and self-driving cars are a major growth area in the future. All regulators in the world except China have approved the buyout of NXP by Qualcomm. Thus, NXP has become political football in the U.S. and China trade war.
Ever since the rejection of the Qualcomm buyout, Broadcom has been on the hunt for an acquisition. In a big surprise to the market, instead of buying a semiconductor company, Broadcom is buying CA Inc. CA, -0.16% CA has nothing to do with semiconductors; it is a software company. If that wasn’t enough, CA is a legacy technology company still tied up with mainframes and suffering from low growth.
The implication here is that Broadcom probably concluded that it could not get approval for buying another semiconductor company. Hence, this is a big win for Trump in protecting American technology.
Within two minutes of the rumors of Broadcom buying CA, The Arora Report was able to give a “buy” signal on CA prior to the buyout. Right now it is only a small gain, but a gain is a gain.
The buyout offer is $44.50 a share in cash. There is a small probability of a higher offer. For this reason, it makes sense for those holding CA to continue to hold. CA does not have characteristics of a typical buyout and was therefore not previously considered a buyout target. However, since the company is now in play, a higher offer could emerge.
Investors need to understand that all buyouts are not the same. Some buyouts produce very large gains, and others produce only nominal gains. Some are quick trades, such as CA, while others take time. For example, The Arora Report bought Pinnacle Foods PF, -0.23% at $32.50, and Pinnacle Foods was in The Arora Report Model Portfolio for a while. Our constant calls were that the company would get bought out. Pinnacle Foods recently received a $67.92 buyout offer from Conagra Brands CAG, -0.50%
The Arora Report also took a small position in Broadcom at $198.40, near the low. The tentative plan is to add to the position as appropriate. The reason for taking the position is that the selloff is overdone. Broadcom has a good record of reducing costs, and it is likely to take significant costs out of CA. In the meanwhile, the semiconductor lines of Broadcom continue to perform well.
Now that Trump is beginning to win, this will open up a number of new opportunities for investors to profit handsomely from special situations. Stay tuned.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.