The Pullback In These 2 Cheap Tech Stocks Is A Major Buying Opportunity

Includes: AVGO, IRDM
by: Trade In Mexico

Broadcom Corporation (BRCM) shares were trading around $38 in the past 12 months, however, disappointing financial results for the past couple of quarters have sent the stock down to about $26, which is not far from the 52-week low. While this leading designer and manufacturer of specialized chips may have hit some speed bumps this year, the long-term outlook remains bright.

Broadcom's chips are used in many smart phones, tablets, and other electronic devices. It even supplies Apple (NASDAQ:AAPL) with chips as well as many other top electronics companies. The smart phone market did show signs of weakness in 2013, since there has not been a truly revolutionary device launched this year. Because many companies experienced this weakness, I don't view it as a company-specific issue for Broadcom. That means revenues and profits could be poised to rebound as new smart phones and other more revolutionary electronic devices are launched by Apple and other companies in the future.

Broadcom could also see growth due to increased market penetration in emerging markets and from new technology in developed markets. For example, its broadband communications chips which are used for digital cable boxes and media servers are expected to see strong growth in countries like India, and Brazil as rising incomes in those countries fuel demand for more entertainment options.

Since Broadcom shares have declined sharply from the 52-week highs this year, it is likely to get some renewed buying interest in 2014 as investors take a fresh look and consider the cheap valuation. Analysts expect Broadcom to earn $2.41 per share and that means the stock is trading for just about 11 times earnings. With the average stock in the S&P 500 Index (NYSEARCA:SPY) trading at about 16 times earnings, Broadcom shares look significantly undervalued. Furthermore, analysts at Goldman Sachs (NYSE:GS) put out a list of the stocks that they deem to be amongst the cheapest in the market and Broadcom was on of the stocks selected.

Another big plus that reduces risks for investors is that Broadcom has a very strong balance sheet with about $2.4 billion in cash and around $1.69 billion in debt. It also offers investors a dividend of 44 cents per share which yields 1.7%. Broadcom started paying a quarterly dividend of 8 cents per share to shareholders in 2010, and it has been raising the dividend slightly every year since. It now pays 11 cents per share, every quarter and that could continue to rise over time. For all of these reasons, investors who take buy this pullback and take a longer-term view might be poised for a solid yield and strong capital gains as well.

Iridium Communications, Inc. (NASDAQ:IRDM) shares have recently experienced a post-earnings pullback that is very similar to one that happened at this time last year. This company reported earnings last November which also caused a pullback and the stock bottomed out at just under $5.50 per share on November 16, 2013. The stock went on hit $7.34 per share in January, 2013, which gave investors who bought the post-earnings pullback very large gains in just a matter of weeks. This is very interesting because it looks like the stock could be set up for a similar pattern this year.

This stock seems to make large moves which might be caused (in large part) by shorts. With about 20% of the float short, this stock has a fair amount of short interest which could be creating exaggerated moves in the stock. For example, when shorts see an earnings miss they might pile on and temporarily drive the stock price down to oversold levels. However, if they see strength in the stock they might get worried about a short squeeze and start to cover in order to limit risk and take a profit if they have one. With so many shorts in the stock, there is always a risk of a short squeeze rally.

Right now, quite a few shorts appear to have profited from a recent pullback in Iridium shares, but just as it was at this time last year, that pullback might be short-lived. Iridium reported earnings of 19 cents per share for the third quarter and this was a miss from consensus analyst estimates of 21 cents per share. While this was a miss, the sell-off appears excessive and that is another reason this stock could bounce back in the coming days and even jump back towards $7 in January as it did last year.

Iridium is a global leader in providing satellite communication services and it has plans to launch Aireon and other services which could add growth potential. Although current profits are not as strong as some expected, this might be because the company is investing in the Aireon project. In the meanwhile the stock could be one of the cheapest in the market since earnings estimates are close to $1 per share for 2014.

One recent positive is that the company announced a new deal with the Defense Information Systems Agency or "DISA" for a $400 million airtime contract on October 18 and a $38 million deal for maintenance and support of the DISA-owned satellite gateway located in Honolulu, Hawaii. This 5 year deal will provide Iridium with additional revenues and steady cash flow.

Some shorts like to spread fear or exaggerate and with Iridium I have heard them talk about concerns regarding the satellites that just don't seem likely or are even downright false. Shorts can say satellites might crash into space junk, or just stop working but these fears are overblown. It seems that some shorts would like you believe that in a couple years Iridium's satellites will all fall from the sky or need replacement sometime soon, but this is simply not true.

Iridium has redundancy thanks to spare satellites in orbit and the current fleet is expected to continue providing service beyond 2020. That means there are many years of service left and the company will slowly begin to launch the Iridium "NEXT" project in 2015, which will allow it to slowly but surely allow it to upgrade its network. By doing this, the company won't experience a sudden or major hit to the bottom line and these upgrade expenses will be easily absorbed over decades thus ensuring steady profits for the company and its shareholders. Considering that Iridium's current satellite network has many years of service left and that newly launched satellites in 2015 will have a lifespan of about 3 decades, the costs of these will be amortized over many years.

In addition, Iridium has U.S. Patents 5,410,728 and 5,604,920, and satellite manufacturing systems that were developed under Motorola through a brilliant former Apple engineer. The system he developed allows for Iridium satellites to be mass-produced on a gimbal (a pivoted support that allows the rotation of an object on a single axis). This means it only takes weeks to complete instead of many months and at "record low construction cost of only US$5 million per satellite." This patented technology and manufacturing system virtually guarantees that Iridium will be able to maintain profits and also position the company for growth for many decades. With this stock trading at bargain levels of just around 6 times earnings, and with short squeeze potential, this appears to be a major buying opportunity.

Data is sourced from Yahoo Finance. No guarantees or representations
are made. Please consult a financial advisor before making investments.

Disclosure: I am long AAPL, BRCM, IRDM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.