Why Broadcom Corporation Shares Could Pull Back

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Wells Fargo downgraded Broadcom  from market perform to underperform on Monday after the chip giant said it was looking to exit its cellular baseband business.

So what: Along with the downgrade, analyst David Wong reiterated his price target of $27-$29, representing about 20% worth of downside to the current stock price. So while momentum traders might be attracted to today's double-digit pop, Wong's call could reflect a sense on Wall Street that the rally isn't fully justified.

Now what: Wells also lowered its 2014 earnings-per-share estimate for Broadcom from $1.47 to $1.45 and its 2015 view from $1.83 to $1.72, on lower revenue assumptions. "While we had thought that it was questionable whether Broadcom would succeed in establishing a strong position in the 4G baseband market, Broadcom's announcement that it is looking at exiting this business does have a material impact on our view of the company and our estimates because it confirms what was previously a concern that might not have materialized," said Wong. With Broadcom shares now flirting with their 52-week high and trading at a clear PEG premium to the industry, it's tough to disagree with Wells' caution.  

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The article Why Broadcom Corporation Shares Could Pull Back originally appeared on Fool.com.

Brian Pacampara has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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