Pelosi Makes Big Bet on Broadcom—Here’s Why It Matters

Key Points

• Nancy Pelosi just exercised up to 20,000 call options on Broadcom stock, building her a position that could be worth up to $5 million.
• Her position makes sense given the looming new government investment of up to $70 billion in artificial intelligence.
• Wall Street analysts call for double-digit upside, and markets are willing to pay whatever it takes to participate.

For better or for worse, there is now an uncommon indicator that investors can consider when searching for the next big potential move in the stock market: keeping track of what members of the United States Congress are buying or selling for their portfolios. While there is a lot of red tape around the fact that these individuals (with potential inside information) are buying, the fact is that investors can still benefit from this information.

One specific investor is Nancy Pelosi, who has become famous for her bold calls in the technology sector over the past couple of years, to the extent that whatever she ends up buying or selling is now seen as one of the surest indicators of a stock's future direction. For this reason, investors should pay attention to her latest stock pick, as evidence will suggest a much broader theme is developing in its favor.

The stock in question is Broadcom Inc.NASDAQ: AVGO, a key player in the semiconductor and chipmaking industry, a red-hot area of the global economy now that the United States and China have accelerated their artificial intelligence race to full momentum, bringing numerous unknown catalysts down the road. At least, unknown to the retail investor, but that’s where Nancy Pelosi’s portfolio can help.

A Multi-Million Dollar Bet on Broadcom Stock

Nancy Pelosi has been holding a large number (20,000) of call options on shares of Broadcom in recent months. Considering that the stock now trades at a new 52-week high after rallying up to 13% over the past month alone, it seems that Pelosi’s conviction in the stock's future is as high as ever, despite her call options being deep in profit already.

Investors can conclude this because she decided to exercise these call options, which means her contracts assigned her the underlying stock stipulated in each call option contract. This event requires a significant cash investment since the leverage aspect of options disappears as a result, and that investment is estimated to be between $1 and $5 million.

By simply selling her call options, Pelosi could have realized a substantial profit, but by choosing to receive this much stock, the message quickly becomes that she is not done riding this name higher. As it turns out, there is a very good reason behind this choice.

President Trump recently announced a new investment wave for the world of artificial intelligence and its role in the United States economy, willing to lay down as much as $70 billion in an attempt to onshore chip and semiconductor production.

This is where Broadcom comes into play. Its significant footprint in the United States positions it near the top of the $70 billion investment queue, and markets are now discovering the potential upside this could bring to Broadcom stock.

The Market’s Take on Broadcom Stock’s Future

While the current consensus price target for Broadcom stock stands at roughly $290 per share, some analysts have chosen to take matters into their own hands to reflect what is truly happening beneath the surface of the company and the broader industry.

Analysts from HSBC, who collectively landed on a Buy rating for the stock, and a valuation target of up to $400 for the company as well. This view would not only call for a wide margin to be achieved in terms of new 52-week highs but also imply that Broadcom shareholders stand to make an additional 43% return from the current stock price.

That would explain why Nancy Pelosi chose to exercise her options rather than cut her profits short, and now the rest of the market is catching on to this future scenario. Because Broadcom stock trades at a price-to-earnings (P/E) ratio of up to 105.2x today, it commands a significant premium to the rest of the computer sector, with an average valuation of 33.1x.

While some investors may suggest this is too “expensive” and overextended, seasoned participants will remind them that the markets are always willing to overpay for the names they believe can deliver a significant performance, leaving the broader S&P 500 index and other peers in the dust.

Now that there is a significant catalyst in part of government spending and investment, justifying this multi-million dollar position by someone who probably has the best information as to where the $70 billion might end up, investors shouldn’t ignore the fact that Broadcom could be a name to bring some additional returns to their portfolios this year.