Talking Numbers

This chart says this stock is a 'conviction sell'

Talking Numbers

This chart says this stock is a 'conviction sell'

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This chart says this stock is a 'conviction sell'

This chart says this stock is a 'conviction sell'
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Goldman Sachs has downgraded Qualcomm to a “buy” rating and gave it a $95 12-month price target, about 19 percent above its Friday close.

Now, how is that a downgrade? Because Qualcomm used to be on its “conviction buy list.” In other words, they’ve gone from really liking the stock to just liking it.

In a note to investors, Goldman Sach’s Simona Jankowski, Doug Clark and Balaji Krishnamurthy write:

“We are removing Qualcomm from the Americas Conviction List (CL), as the catalysts laid out in our November 12, 2013, note have largely played out (more aggressive capital allocation, chipset margin expansion, ‘stronger for longer’ chipset segment, and resilient royalty ASPs). Looking out from here, we do not expect material upside to consensus estimates in the intermediate term and may even see some near-term downside. However, we maintain our Buy rating, as in our view the stock is undervalued relative to its growth and returns profile.”

However, Richard Ross, global technical strategist at Auerbach Grayson doesn’t think the Goldman Sachs downgrading is far enough. “This is a ‘conviction sell’ for me,” he said.

The technicals show there was strength in Qualcomm’s stock,Ross said. It broke above its 100-day moving average about a year ago and was in an uptrend. But, that change a few months ago when it began trading sideways. On a year-to-date basis, Qualcomm is up 7 percent while its benchmark, the PHLX Semiconductor index (SOXX), is up 20 percent.

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According to Ross’ charts, Qualcomm has been in a trading range between $74 and $81 per share since March. Because it has traded sideways, it inevitably broke below its uptrend line. Ross believes its next target is its 100-day moving average, currently at $78.67. 

“You want to use that 100-day moving average as your initial sell signal and then generate a confirm sell signal on a break below the low end of that range,” said Ross, a “Talking Numbers” contributor.

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A look at a long-term chart shows support changing from the 100-day moving average to the 100-week moving average. “We change the periodicity but it’s still has the same impact,” he said. “I think we get a magnetic pull there. That’s a pullback back to that 100-week moving average where prior resistance now becomes support. That’s about 15 percent down from here. That’s the type of summer correction that we often see in technology stocks and that’s what we’re going to get with Qualcomm.”

Erin Gibbs, equity chief investment officer at S&P Capital IQ, disagrees with Ross and is more optimistic. “S&P Capital IQ Research downgraded this also to a ‘buy’ back in April when [Qualcomm] effectively missed their revenues but beat their earnings,” she said. “This was really just about a delay in revenues. The sales haven’t been quite as high because China consumers aren’t buying as much as everyone’s waiting for the network upgrades to 4G and LTE.  Also, there’s been a lot of delays in purchases waiting for the iPhone 6.”

Gibbs believes pent-up demand will eventually turn into revenues for Qualcomm. “It probably won’t come until the fourth quarter of this year,” she said. Though she believes the stock may underperform over the next three months, “we see this as still a buy.”

To see the full discussion on Qualcomm, with Ross on the technicals and Gibbs on the fundamentals, watch the above video from CNBC’s “Street Signs.”

[Disclosures: S&P Capital IQ Research rates Qualcomm (QCOM) a buy. Qualcomm (QCOM) is in a position in more than one S&P Investment Advisory Services model portfolios advised by Erin Gibbs.]

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