Ticker Reports for July 27th
Why Call Options Volume for These 2 Stocks Spiked Together
That’s where stock options come in. They allow investors to achieve leverage so that returns can be amplified when an underlying stock moves. But this leverage can bring on quick – and large – losses if the move and timing of that move are wrong, so investors need to correctly identify both of those factors. Knowing this, investors should pay attention when the market reports above-average options volume for stock, particularly call options (where the bet is that the stock will go up), since it signals the expectation of a relatively big move relatively quickly.
Today, two stocks that are surprisingly correlated by their share of the technology sector are reporting a surge in call option volume: Lockheed Martin Co. (NYSE: LMT) and Taiwan Semiconductor Manufacturing Co. (NYSE: TSM).
Lockheed Martin and Taiwan Semiconductor Manufacturing: A Symbiotic Relationship
One is an arms manufacturer, the other is a chips and semiconductor maker, so what do these two possibly have in common? To start, they are co-dependent. Most of the aircraft, explosives, robotics, and software that Lockheed Martin’s weapons use to stay competitive and near cutting-edge technology come from equally advanced chips.
Lockheed Martin buys these chips from Taiwan Semiconductor Manufacturing, so the success of one company can spill over to the success of the other. Some of these chips even go to Lockheed Martin’s F-35 Lightning II fighter jets, among other powerful weaponry.
After Lockheed Martin reported its second quarter 2024 earnings results, which were so good that the stock rallied by 12% in a single week, management provided optimistic financial guidance for the rest of the year. The highlights of this report were not only a 9% jump in revenues but also an order backlog of nearly $160 billion moving forward. Some of these backlogs include the latest Aegis Combat System, an artificial intelligence-assisted program with advanced sensors and data management that can only be delivered adequately with Taiwan Semiconductor's help.
Sales guidance for Lockheed Martin was raised by nearly $2.5 billion for the rest of 2024, which may be why analysts at Deutsche Bank raised their price targets to $600 a share right after the earnings release, directly calling for a net upside of 14.5% from where the stock trades today.
As Lockheed Martin's outlook improves, so does Wall Street's forecast for Taiwan Semiconductor's earnings per share (EPS). Today's projections are set at 27.5% for the next 12 months, making it easier for Susquehanna analysts to place a valuation of $250 a share for the stock, daring it to rally by 56.6% from today's prices.
United States Pushing to Strengthen Domestic Semiconductor Production
This is why the U.S. government is pushing hard on the CHIPS and Science Act, which will fund some of the most vital players within the chips and semiconductors industry. The aim is that this financial backing will help these brands onshore their operations in the United States rather than being concentrated in Asia, as it is now.
The United States learned an important lesson in diversification when the COVID-19 pandemic hit the global economy, and lockdowns in Asia caused a massive disruption in the supply chain of chips and semiconductors. This delayed most products, from consumer electronics to vehicles.
The United States is leaning on companies like Taiwan Semiconductor and Intel Co. (NASDAQ: INTC) to make this onshoring a reality, with the latest round of funding granting up to $6.6 billion to Taiwan Semiconductor.
Call Option Traders Target the Upside Potential
Knowing that these two companies are co-dependent and because onshoring semiconductor production is vital to national security since Lockheed Martin's developments rely on it, call option traders have flocked to both stocks, seeing the strong upside potential.
This screener spotted the action, and the breakdown is as follows. For Lockheed Martin, a $589,398 bet on call options was amplified significantly after accounting for leverage. For Taiwan Semiconductor, the call option volume translated into a $1.4 million position, which is much bigger after applying leverage.
These are not small bets by any means, and investors need to remember that this capital is subject to the two options caveats: direction and timing.
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Bargain Alert: 3 Stocks Worth Watching While The Market Cools
Since closing at a record high less than 10 days ago, the benchmark S&P 500 index has been on the back foot. For the moment, it's not looking like a whole lot more than a healthy mid-rally correction. After all, it had logged almost 40% of gains this year so far, and some questions were starting to be asked about the short-term health of the rally.
An increasing reliance on a few heavyweight tech stocks over recent months, sketchy earnings in the past few weeks, and a cyclical shift from large-cap to small-cap have all combined to test the bulls. Yesterday's 2.3% drop for the S&P 500 alone made it its worst day since 2022.
But this is an entry opportunity for those of us on the sidelines who remain bullish on equities through the rest of the year and into 2025. Here are three tech stocks in particular worth considering at a discount.
Toast's Impressive Run Despite Recent Dip
Toast (NYSE: TOST), the restaurant software company, has been on a solid run since markets turned north en masse last November. Though an 8% drop in Wednesday's session wouldn't have made for pleasant viewing, the stock is still up more than 75% in that timeframe.
It's worth noting that only last week, the team at Mizuho raised their rating on Toast stock from Neutral to Outperform. This was interesting timing, as the stock was right on the edge of breaking through the upper end of the range it's been stuck in since bottoming out from 2022's drop.
The team there obviously sees little reason to doubt Toast's ability to achieve this milestone and gave the stock a fresh $33 price target. Thanks to the selloff over the past week, that's pointing to an attractive upside of some 30% from where Toast closed last night.
The Trade Desk Continues to Attract Bullish Analyst Sentiment
Shares of AdTech giant The Trade Desk (NASDAQ: TTD)have been trending upward since the start of 2023. By the start of this week, they'd gained an impressive 150%, and while yesterday's 11.5% drop will have been hard to stomach, several analysts have been weighing in on the Buy side recently.
Morgan Stanley, for example, reiterated its Overweight rating on the stock on Tuesday of this week while boosting its price target to $110. This echoed the note from the Wedbush team on Monday, who did the same.
Last week, Wolfe Research and Oppenheimer reiterated their Outperform ratings, the latter giving The Trade Desk a street-high price target of $120. Considering the stock closed below $90 last night, that's an upside target of more than 30%.
Broadcom: An Attractive Alternative to NVIDIA
To round off the list, we have another computer and technology stock. Broadcom (NASDAQ: AVGO) is known for its semiconductor products and was only this week singled out by Citi as one of the increasingly attractive alternatives to NVIDIA (NASDAQ: NVDA).
This may shed light on Broadcom's multi-year surge, which saw gains exceeding 350% from 2022 through last month, and its recent 20% decline. For those observing from the sidelines, now might be the ideal moment to get involved.
Like with the others on this list, several analysts have been clamoring over each other to call it a screaming buy. This month alone, Oppenheimer, Cantor Fitzgerald, TD Cowen, and Rosenblatt Securities have all reiterated their Buy or Outperform ratings on Broadcom. When it comes to the potential upside, it doesn't get much better; all gave it a price target of $200 or higher, with Rosenblatt's $240 suggesting they're targeting near-term gains of around 60%.
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Qualcomm Stock Could Be On The Verge of an Impressive Rally
Equities across the board are starting to soften after months of gains, making it a good time to go bargain-hunting. Many of the stocks that have enjoyed triple-digit percentage gains this past year are also facing some of the heavier selloffs. Qualcomm Incorporated (NASDAQ: QCOM), a semiconductor tech stock, for example, is in the middle of a 20% drop after a 120% rally.
The bears will say that everyone is finally realizing how overly reliant the market has become on a few big stocks, particularly those related to artificial intelligence (AI). However, the more optimistic investor will see this as a potential buying opportunity and will be on the lookout for discounted stocks. Qualcomm is one such stock that’s been flagged as a potential bargain, so let’s jump in and take a closer look.
Qualcomm's Bullish Performance Inspires Analyst Optimism
There are a couple of reasons to be excited about Qualcomm. First, they’re performing well as a business and have been delivering earnings reports that have smashed analyst expectations. Their Q2 numbers, for example, were strong across the board, while management’s forward guidance was considerably higher than expected.
Seeing earnings beats of this nature is one of the most compelling signs that a stock is performing well and that any subsequent harsh drop might be overdone. Investors will get a fresh look at Qualcomm’s performance when the company delivers its Q3 numbers next week, but for now, there are no reasons to think it won’t be similar to last time.
Several analysts have picked up on this theme over the past week, reiterating the bullish outlook on Qualcomm stock and even increasing their price targets. These kinds of optimistic calls, both during a 20% drop and ahead of an earnings report, speak volumes to their level of conviction in the buying opportunity here.
Qualcomm Is a Top Pick in the Semiconductor Industry
Take the team over at Susquehanna, for example. They reiterated their positive rating on Qualcomm last week and gave the stock a boosted price target of $250. The Robert W. Baird team echoed this on Tuesday of this week and did the very same thing. Considering Qualcomm shares closed at $181 last night, these refreshed price targets point to an attractive upside of almost 40%.
In a note to clients, Baird named Qualcomm as a top pick from the semiconductor industry, pointing specifically to the company’s bullish exposure to AI and strong market demand for its products. Similarly, Susquehanna also sees strong end-user demand driving sales beyond current forecasts, to the extent they were bullish enough to raise a price target on a falling stock right before its earnings report.
Qualcomm's Attractive Technicals
For those of us on the sidelines, there’s also the technical side to consider. Like many other equities in recent weeks, Qualcomm stock was, by many measures, starting to look a little frothy. Take its relative strength index (RSI), for example. In June, it was giving a reading of 82, indicating extremely overbought conditions. For context, anything above 70 on the RSI is considered overbought, while anything below 30 is considered oversold.
So, with Qualcomm shares having been extremely overbought just a few weeks ago, it’s perhaps no surprise they’re experiencing a correction. But the slide has been so steep that the stock is now verging on oversold levels. With a current RSI of less than 36, Qualcomm's RSI would only take one or two more red days to indicate extremely oversold levels. If that happens, don’t be surprised to see buyers swooping in en masse, as this will be simply too good an entry opportunity to miss.
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