The action in Qualcomm (QCOM) yesterday and today provides some very interesting lessons in trading. The announcement that QCOM and Apple (AAPL) had settled their long running dispute was not anticipated by the market so none of the value was reflected in the chart prior to the news. This was a complete surprise to the market and that creates a whole different type of trading dynamic than a situation when news is well anticipated.
In this case, some very fast traders jumped into QCOM on Tuesday as soon as they saw the headline. It moved up very quickly and that likely caused some slower moving traders to believe that they had missed the move. Since there wasn't any immediate numbers released it was not possible to have any feel for what the news was worth.
However, within a short time there were comments issued that the deal with Apple could be worth $2 in EPS to QCOM. That is sizable but what is a reasonable multiple to assign to it? QCOM had a trailing PE of about 15 when the news hit so that would suggest it is worth $30.
That seems like a very good basis for a big move but it isn't easy to chase a stock that has already made a $10 or more move. It generally takes a while for market players to appreciate the valuation argument which is why it doesn't instantly go up $20 or whatever.
Once the initial chasing cools off, it is time to think a bit more strategic. The first thing to keep in mind is that the analysts that follow QCOM will not immediately price in all the good news. Analyst tend to move incrementally. They prefer to gradually raise estimates and target prices as a company performs rather than overestimate and then be forced to cut their numbers.
Once the initial excitement in QCOM has settled down the best strategy is to watch for a trading range to develop. QCOM was already about $5 off its early highs at around $82.50 but well above yesterday's high of $71. Those are the rough initial parameters for a trading range at this point.
At the open this morning, I sold down some of the QCOM I bought on the news yesterday. I am holding a small position that will help keep me focused on the stock as it develops further. I am not going to rush to add at this point but will wait to see what the intraday lows and highs are as we approach the close. I suspect there will be a good amount of 'flipping' by those that caught some yesterday but then the longer term holder should start to nibble on weakness as it cools off.
This sort of situation generally leads to a longer term uptrend. If you wait for a trading range to develop that should give you a clear stop out point in case the stock does not continue to trend higher.
The Qualcomm news is very significant and it will take a while for the market to appreciate it. That means there is good potential here and if you use the trading range that develops in the right way you can manage risk very effectively.