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Qualcomm – extremely overbought after a 74% rally within 3 months! (23 Apr 19)

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Dear readers,

This week, Qualcomm caught my attention as it has appreciated approximately 74% from US$49.10 to trade at US$85.62 in less than 3 months. This is due in part to the favourable announcement that Qualcomm and Apple have reached a multi-year settlement agreement (click HERE for more information)

 

Why is it interesting?

Personally, I think Qualcomm may be a potential short target with a favourable risk to reward proposition with a take profit of a few bids, base mainly on a technical perspective.

 

Basis to short

a) With reference to Chart 1 below, Qualcomm is on a strong uptrend evidenced by its rising exponential moving averages and golden cross formations. However, due to its relentless rally, it is extremely overbought. Most indicators are stretched. RSI last trades at 92.0 on 23 Apr 2019 which is the highest since 2000! ADX last trades at 48.5 on 23 Apr 2019 amid sharply positive placed directional indicators. MACD last trades at 6.3, ten-year high levels;

Near term supports: US$83.68 / 82.50 / 79.84 / 78.70 / 76.52 / 75.00

Near term resistances: US$86.00 / 87.50 / 88.00

Chart 1: Qualcomm’s strong up-move since end Jan 2019

Qualcomm US$85.62

Source: InvestingNote 23 Apr 19

b) Based on this website https://www.marketbeat.com/stocks/NASDAQ/QCOM/insider-trades/, it seems like insider is taking the recent rally to lighten their exposure. For example, Cristiano R Amon, President of Qualcomm sold 13,466 Qualcomm shares at US$60.00 on 16 Apr 2019. James H Thompson, EVP of Qualcomm sold 40,000 Qualcomm shares at US$50.75 on 11 Feb 2019;

c) Based on Figure 1 below, Qualcomm’s valuations are not cheap. Qualcomm trades at 26.0x current PE (note this is based on 22 Apr 2019 closing price US$81.97; last done price is US$85.62) vis-à-vis its 10-year average PE of around 18.7x. Other metrics such as P/BV and P/CF are significantly above its 10-year average.

Figure 1: Valuations are high on a relative basis

qualcom 10Y PEBD

Source: Bloomberg 23 Apr 19

As usual, it is necessary to consider the potential risks to have a balance view. Some of the risks include (but not limited to):

a) Qualcomm’s average true range amounts to US$2.71. This is a volatile stock and its volatility needs to be taken into consideration for position sizing;

b) I am not familiar with Qualcomm’s fundamentals. This is my first time looking at this stock. There may be other reasons for the sharp up-move (known to the market but unknown to me), besides its settlement with Apple announced this month;

c) Some analysts continue to raise their target price for Qualcomm. With reference to Figure 2 below, it is noteworthy that the highest target price is around US$100. Average analyst target is US$82.41;

Figure 2: Average analyst target US$82.41, already above current price US$85.62

Qualcomm analyst target

Source: Bloomberg 23 Apr 19

d) There is no rule that RSI cannot go above 92 or even 95. However, on the balance of probability, it is less likely that Qualcomm can keep on rising without some form of pullback as overbought pressures escalate;

e) Intel reports results on 25 Apr 2019 and Qualcomm reports results on 2nd May 2019 before market. Results are typically an event risk.

 

Conclusion

In view of the above, there is no doubt that Qualcomm is on a strong uptrend. However, it seems likely that near term potential upside may be capped, as overbought pressures escalate. I have initiated a small short position in this stock via CFDs, with the aim of getting a couple of bids of potential profit if any. This is a trade based on potential retracement, as overbought pressures escalate and not a trend reversal play. Nevertheless, there are significant risks (highlighted above, for example, I am not familiar with Qualcomm’s business and its fundamentals) which we should be aware of. It is noteworthy that as I am a full time remisier, I can change my trading plan fast to capitalize on the markets’ movements (I am not the buy and hold kind). Readers should exercise their due diligence and evaluate carefully.

Readers who are not familiar with Qualcomm can take a look at Wikipedia’s concise description HERE.

 

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