AVAGO TECHNOLOGIES: DEVELOP AN EXIT STRATEGY

(AVGO, $129.69, up $0.22 midday)

 

I last wrote about semiconductor manufacturer Avago Technologies Ltd. on February 26th, when the stock price shot up over 10%, due to the announcement of Avago’s then-pending acquisition of Emulex Corp.  (The transaction was completed on May 5th.)

Let’s review the fundamentals & chart, now that the stock price has had a chance to settle into a new trading pattern.

 

Earnings outlook:  2015 earnings per share (EPS) are still expected to grow aggressively, at 72% (October year-end).  Don’t get too excited, because 2016 & ’17 EPS growth is projected to slow to 7.9% and 3.8%.  (These slow-growth numbers have been expected for a long-time, and therefore do not represent a surprise to professional investors.)

The 2015 price/earnings ratio (PE) is very low vs. the EPS growth rate, at about 15.4.  At first glance, that indicates a drastic undervaluation in the stock price.  However, the 2016 PE is 14.3, which is much higher than next year’s EPS growth rate.  Investors should be aware that professional investors — who move the stock market with their large transactions — are not going to like Avago’s 2016 & ’17 stock valuations.

AVGO has a dividend yield of 1.17%; and the 2014 long-term debt-to-capitalization ratio is high at 62%.

 

Technical chart:  The stock has been trading between $114 – $136 since late February.  It reached a new high of $136.28 on March 23rd.

 

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Recent recommendations:

• The stock price rose as much as 28.7% after January 13th, when I said, “Current shareholders should expect additional capital gains.  Momentum investors should jump in now…”

• Then on February 26th, I encouraged buy-and-hold shareholders to continue to hold their shares.

 

Current recommendation:  

• Buy-and-hold investors who want to minimize downside risk should develop an exit strategy; then reinvest their capital into an undervalued growth stock.  (Have some good stocks picked out in advance. The entire point of using stop-loss orders is to re-deploy the cash into better growth opportunities; not to sit in cash and watch to see if AVGO’s price rebounds.)

• Momentum investors who bought AVGO based upon my January 13th trading recommendation should use stop-loss orders, no lower than $121.

AVGO shares do not qualify for a Goodfellow LLC buy rating due to slow 2016 & ’17 EPS growth, comparatively high 2016 & ’17 PE’s, and a high debt ratio.  It is true that the chart might be signalling a near-term upside breakout.  However, a stock without strong underlying fundamentals is not an investment: it is a gamble.  Under no circumstances would I purchase AVGO shares right now.

Goodfellow LLC Rating:  Develop an Exit Strategy, Public. (05-20-15)

Avago Technologies purchased Emulex Corp. (ELX) on May 5, 2015; and also purchased LSI Corp. (LSI) in 2014.  AVGO was added to the S&P 500 index on May 7, 2014.

Chart courtesy of StockCharts.com.

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Crista Huff

President

Goodfellow LLC

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