Lots Of Options With A Broadcom Qualcomm Merger

If you believe the news, a Broadcom / QCOM merger makes for some interesting and complicated questions.

  • An unsolicited $100 billion plus-offer to buy Qualcomm Inc. — a company that’s trying to close a $47 billion deal to buy NXP Semiconductors NV (NXPI) — is pretty stunning.
  • I see a lot of cost and product synergies and cost saving for Broadcom
  • Add in the QCOM and NXPI valuations, and the proposed $70/share could be a bargain in the long run.
  • But, Broadcom may not even want to pursue or finance the NXPI deal.
  • And there are potential settlements with Apple on QCOM’s side which would affect the price. Since Broadcom is already such a big Apple supplier, a merger might work in AVGO and QCOM’s favor.
  • One can count on a lot of push back from the anti-trust encampments. There will most likely have to be some concessions in the form of asset sales to make this deal work.
  • AVGO recently announced it would re-domicile from Singapore to the U.S. regardless of the fate of proposed corporate tax reforms.
  • My guess is, regardless of the outcome, their rates will go up.
  • I think this deal aids in the good PR factor for any questions regarding approving the merger.

This potential merger also creates some very interesting option strategies.
When the news was announced Friday afternoon during trading hours, both stocks witnessed volatile price movements. Interestingly, both ultimately went up on the news. Sometimes, the price of the company making the offer goes down. But in this case, most investors seem to think this merger could be beneficial to both Broadcom and QCOM.

However, with a potential buyout price of $70 per share, QCOM’s price action stopping at $61 makes for some opportunity in my opinion.

If you believe the news and believe this will happen then it is safe to say that a minimum price of $70 for QCOM is very attainable.

If you don’t believe the news, or think this is an impossible deal, then the price movement on QCOM from $55 to $61 is not sustainable.

Based on the price movement alone, I think the rest of the investment world is more than slightly skeptical. This would warrant looking for the price of QCOM decreasing.

  • One could sell out of the money calls and purchase out of the money puts.
    Conversely, believing this is a done deal, one could anticipate QCOM’s price increasing to $70 per share.
  • One could sell out of the money puts and buy out of the money calls.
  • One could also buy 100 shares or more of QCOM, (remember you believe the price is going up) and sell covered calls and puts to reduce your cost and collect the premiums.

Taking a look at various option dates and prices, I am particularly interested in the short term play with the December monthly pricing.

Personally, I think buying a December 15 $70 Call and a $55 Put is worth the gamble.

But other time frames, such as April ’18 and January ’19, would make worthy candidates for options trading. At this point in time, I am really on the fence believing the validity of the buyout/merger actually happening.

I think if the rumors aren’t killed soon or if the news is confirmed, then hype and bidding wars will help drive this up in the near term but, with all the regulatory and legal hurdles involved, the deal will ultimately fail.

So what are your thoughts on this? How would you play this scenario?

Advertisements

Tomaeto Tomahto

Facebook is set to report earnings today after market close. Recent sentiment has been very bullish, however, with the fall of Apple, Google, and Microsoft; the market is now second guessing itself.

Put action has greatly increased in the last couple days and investors are seeing a true divergence in opinion.

And it is not just showing up in mainstream media. The charts, and subsequent interpretations, are showing the same mixed signals.

IBD sees a cup and handle consolidation pattern with a $117.09 buy point. A bullish pattern. We will call this the Tomaeto. 😉

ibd-fb

Yay! If it does indeed surprise.

Another stock and chart analysis site comes to a much different conclusion. A multiple top bearish pattern. We will call this one the Tomahto.

finviz-fb

Ahh!! If it does indeed crash.

So which one will it be?

Potaeto or Potahto?

It Started With A Falling Apple

Bad Apple

Last week (Friday to be exact) a report was published that Apple was extending its iPhone production cut into next quarter due to slowing sales.

The stock promptly fell 1%.

Being the eternal optimist and believer in all the better human qualities, I questioned the timing of this report being released the afternoon of expiration Friday.

I thought to myself, gee, somebody just made a ton of money.

Just lucky I guess.

But, sometimes I know the start of a pattern when I see one, so I place some puts on the good ‘ol Apple.
This was in fact contrary to some of my other partial positions in other techie stocks like Microsoft. I also had my eye on Citrix and Amazon.

Just in case you missed it, there is a movement afoot in the tech world, it’s called the cloud.

Apple is in the cloud with music and storage of information but not like the others. Their bread and butter is in the iPhone.

I was cautiously optimistic on the cloud.

Then VMware had a blowout quarter and so I decided it was safe to go into the cloud a little deeper. Citrix rewarded handsomely. Great! This is working out perfectly.

I thought.

Cloud-money

The cloud is looking good!

Then today happened.

Google and Microsoft both missed, badly. One commentator said it felt like having the rug pulled out from under you. To make matters worse, other big names missed too. Visa and Starbucks.

So, now I’m thinking that it was a good thing I held off on Amazon.

This reporting season could get uglier before it gets better. Sure, you are going to have some winners like VMware, Citrix, ServiceNow, etc. But perhaps the pundits were right about this being the worst reporting season in years and setting the expectation bar as low as they have.

If folks were looking for the catalyst for a pull-back, proof in the pudding as they say, they just may have found it with Google, Microsoft and, remembering where it all started, Apple.

You Got To Have Sole

Nike

Several years ago I hired an employee where I worked who, as I later discovered, owned over 100 pairs of Nike shoes.  He had three closets full of them.  Two at his house and one at his mother’s.  Of course he never wore all of them.  In fact, most of them, he never wore at all.  Some he wore only once and then put away.  Some he occasionally sold on eBay, but most – he just collected.

This was so alien to me.  When I think of going out to buy a pair of sneakers, I look to buy them because I, or one of my kids, need a pair of sneakers.  Not because I feel compelled to own the latest and greatest model that just came out.  And I certainly don’t think about spending hundreds of dollars on a pair of sneakers.  I think of going to the local Walmart or Payless shoe store.

This person was, and still is, a huge sports fan.  He followed basketball, which explains why he was so hooked on Nike shoes.   Since the early 90’s, Nike has infiltrated amateur and collegiate sports and has successfully hooked millions and multiple generations of sports fans.  Of course, their tactics came under scrutiny and if you ever want to see a great documentary on how amateur sports, and college sports in particular, has become such a business – and in some ways – a racket, you need to watch the ESPN 30 for 30 series called Sole Man.

I highly recommend it.

Being a sports fan myself, I knew companies endorsed athletes and athletes had signature shoes and clothing lines.  But seeing firsthand how pervasive this phenomena is within certain cultures and segments of the population and how fanatical certain consumers can be; it was a real eye-opener for me and really was the first time I started taking Nike seriously as an investment idea.

It was at about this time that Nike also released their five year global growth strategy.

In this publication Nike outlined their goals for expanding into global markets.  One of the key features was something called DTC, Direct To Consumer, marketing.  This segment includes brand name Nike storefronts and the Nike.com online store.  The DTC line of business has higher margins because Nike does not have to share revenues with middle men or third parties.  Over the years they have very successfully leveraged their brand and high end merchandise to market directly to their loyal consumer base both here in the states and around the world.

BTW, the employee I mentioned earlier, he purchases over 90% of his shoes either online from Nike.com or from one of their storefronts.  The others, he gets from eBay.

Nike has been very successful implementing this DTC model.  So who else has a similar strategic model?   Two companies which immediately come to mind are Apple and Ulta.  Both companies can be considered specialty retailers with high end products and name recognition.  Both companies have brand name brick and mortar storefronts.  Both companies have a well-established online presence and a loyal, if not somewhat fanatical in the case of Apple, fan base.  I constantly keep these companies on my ready list and often purchase or add to positions during weakness.

With this information in mind, I am going to expand my research for companies implementing a similar DTC strategy.

I curious if anybody else knows of similar companies with similar DTC strategies.

Trivia:

During my research online of Nike, I came across this interesting fact.

Most of the sneakers sold in the U.S. are made outside the country, usually in places where cheap labor is easily available. However, the cheap labor costs are usually offset by the fact that shoe companies have to pay a 37.5% tariff on sneaker imports. Nike, however, seems to have found a way around this problem for its Converse brand. How has Nike done this? By proving that Converse shoes are actually slippers. Nike did this by creating a process for the manufacture of Converses that makes its shoes slippers in the eyes of the law. Under U.S. law, sneakers are defined as footwear having a rubber sole, while slippers are defined as footwear with a fuzzy sole. Converses are manufactured in such a way that they have a rubber sole covered by a fuzzy layer which quickly wears off when the sneakers are actually worn.  As a result, the company has been able to keep the average unit price of its Converse shoes down to $55 since slippers are only subject to an import tariff of 3%.

It seems Nike is also innovators of loopholes as much as they are with shoes.

Made In China

MADE-IN-CHINA

When the government of the second largest economy in the world decides to devalue its currency, people, companies, and indeed the entire world notice.  That is what happened this past week when China devalued its currency, the yuan.

But what does that really mean?  And how does it affect the rest of us?

 

Cheaper Imports, More Expensive Exports – for us.

For stuff made in China, a weakened yuan is your friend. When the yuan falls in value, goods imported from China become cheaper. And China makes a lot of things from cars and computers to clothing and furniture. Conversely, businesses will find it more expensive to sell their goods to China.

 

  • China is a huge market for both technology and luxury brands. The slowdown in China was already a worry. A devalued currency will cut further into their earnings.
  • Companies that make chips for mobile phones do a lot of their business — sometimes most of it — in China.
  • For some tech companies like Apple the effects are two way. It manufactures its phones in China, so presumably it will be able to buy its hardware for a lower price. However, Apple sells iPhones in China too, and the currency move makes iPhones more expensive to ordinary Chinese consumers. Investors took the news as an overall negative.
  • Companies that sell raw materials in China sank. China has been a big customer for companies that mine iron ore, copper and aluminum, among other metals. The fear is that a weaker yuan will drive up the cost of raw materials at a time when demand is already depressed.
  • For companies that purchase most of their goods from China, such as Walmart, their cost of doing business could go down, and therefore those savings would be passed on to the consumer.

 

Lower Interest Rates

The Federal Reserve is poised to raise historically low interest rates as employment returns to healthier levels. A stronger dollar against the yuan could depress inflation because Chinese goods are cheaper.

 

  • The Fed could hold off on upping rates this fall because it already is worried about inflation being too low.
  • Those with mortgages rates, or looking to buy a home, explicitly tied to base rate moves would benefit.
  • Income investors and savers looking for more interest — not as much.

 

Cheaper Gas

China, consumes a lot of oil, second only to the U.S. However, oil prices are denominated in dollars, so a devalued yuan means China’s purchasing power is reduced, which could prompt the Chinese to spend less on oil-based products.

 

  • That reduction in demand could lower prices, an upside for American drivers.
  • For stocks and investors who follow the price of oil, the price is going down.