Avago: In the Chips

06/17/2014 8:00 am EST


Nicholas Vardy

Editor, Oxford Wealth Accelerator

Our latest featured recommendation, a Singapore-based technology firm, develops and supplies analog semiconductor devices for over 40,000 customers, explains Nicholas Vardy, editor of Triple Digit Trader.

Avago Technologies Limited (AVGO) makes radio frequency chips that are used in the iPhone as well as smartphones from other mobile-device companies.

Avago was actually a part of Hewlett-Packard for three decades, before it was spun off with the whole HP semiconductor business as part of Agilent Technologies.

Today, Avago operates design centers in Asia, Europe, and the United States, while its manufacturing facilities are primarily in Asia. About 85% of its sales come from outside the United States. Up over 35% in 2014, here's why I think Avago is set to continue its market-trouncing Bull Run.

First, spin-offs like Avago have a strong record of outshining the market. An index of just such companies has outperformed the broader S&P 500 (SPX) by 2.5 to 1 over the past five years.

Second, Avago recently completed a $6.6 billion acquisition of LSI, which makes semiconductors and software used in storage and networking equipment. This move positions Avago as a substantially larger and better-diversified semiconductor company with a balanced exposure to several diverse global growth markets.

Third, the LSI acquisition allowed Avago to enter the S&P 500. Such a move always triggers a lot of index fund buying, as well as interest from active managers who focus only on S&P 500 stocks.

Finally, because it is based in Singapore, Avago is also getting a boost from the recent increased focus on international stocks.

Avago is on a roll, with both profit and sales growth accelerating for four straight quarters.

Driven by wireless performance and smartphone growth in China and Korea, Avago's recent revenues rose 25% from the year-earlier quarter to $701 million. Earnings per share rose 39% to 85 cents, far above the consensus of 76 cents.

The stock is in a solid uptrend, although it is overbought for the short-term. The stock boasts very high relative strength versus the broader US market. Current target prices on Avago range between $80 and $85.

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