Broadcom: Statistically Cheap

| About: Broadcom Limited (AVGO)

Broadcom (BRCM) is up 24% since the beginning of the year. Digging up the 10-K, "cash flow provided by operating activities" as a percentage of sales, has been hovering around 20-25% mark, which is reasonable. That is, the company has been able to maintain the percentage of cash flow, even as the sales have zoomed by 3x, in the last seven years.

So does this suggest the current price as a "good buy"? Well, to decide that, we could look up historically how the stock has fared as a percentile of sales, and NOT percentage. That is, we calculate price/sales-per-share (or market-cap/sales), and then build a percentile chart. If the chart strays below, say 30 percentile, then, statistically, the share price has remained at that level or below, only during 30% of its entire history.

Conversely, if it trespasses the 90 percentile level (and climbing higher), then it would mean that the ratio (P/S) has historically remained there only at 10 percent of its time. For purposes of brevity and meaning, we ignore the run-up to the dotcom bubble and subsequent fall.

As observed, the current P/S is 10.89, which lies midway between the 10 and 30 percentile mark. And going forward, as the sales increase, very likely, P/S would nudge upward. By definition, price would nudge upwards too. $50 by the end of year? Or higher? Worth a bet.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.