Introduction
Broadcom (NASDAQ:AVGO) is currently a buy for certain investors. This requires acceptance of the existing uncertainties, a lack of risk aversion, and a long-term investment horizon. In return, investors are rewarded with an absolute market leader that is involved in promising megamarkets. A high dividend yield with further increases rounds off the overall picture. I hold Broadcom in my widely diversified bond portfolio. I will be increasing my holdings over the next few days. In this article, I will go into the individual aspects and explain my decision in more detail.
Corona-based time travel investing
The markets are falling worldwide. The majority of investors are, therefore, mainly thinking about selling rather than buying. With the associated price losses, the situation arises that companies fall back to past values. Investors who buy companies in such a phase, therefore, pay the same value as another investor in a previous period. In the following, you can see what I mean when you look at Broadcom share price development:
So, whoever buys Broadcom now will pay the same price as investors in 2017 (and then again in 2018). So, if you have been frustrated in the meantime about not having invested in Broadcom before, now is a good time to make up for this mistake. In this form, investing is a bit like time travel, and that is what is interesting about stock market crashes or major corrections. They open windows for investors to travel back in time and put their portfolio in the way it would be now if they had made an investment decision in the past instead of today. Having said that, there are, of course, a few things to consider, which I would like to go into in more detail below.
The right mindset is decisive
The approach I pursue with my investments is based on a concrete mindset. What do I mean with the mindset of investors?
(Source: Mindset is everything)
For me, a mindset of investing is a holistic approach to investing as a mechanic for growing wealth. I would describe it as the most important prerequisite for investing. From my perspective, two elements are decisive here:
- You need to know what you're doing.
- You need to know why you are doing this.
Of course, this can be subdivided much further. In a previous analysis, I have identified the following four anchor points that can be assigned to these two elements.
- Timing is not possible
- Recession/book price losses are coming
- Stick to reality, not emotions
- Going full in for the long term
From this, a variety of conclusions can be drawn for one's own investment decisions, which are also helpful for Broadcom. For the reasons mentioned above, I pursue a long-term approach. Speculating is therefore not for me. That's why I view Broadcom from an investment perspective and not in terms of short- or medium-term speculative arguments.
A good moment to invest
In times of globally falling markets, the question of selling does not arise for me. Nevertheless, the question may remain as to whether it makes sense to reinvest and buy back further shares in a company at a certain point in time. For example, the question may arise as to whether a company will suffer particularly from a crisis and whether there is particular uncertainty here. However, unlike travel operators or airlines, Broadcom does not necessarily face a risk of coronavirus that is higher than the risk that affects the economy as a whole. Accordingly, the question of whether there is a good time to buy is more of a control consideration, whether there are obvious counter-arguments which concern Broadcom in particular and not just the macroeconomic world as a whole.
The uncertainties do not change the fact that Broadcom is a strong company
Based on this, I currently consider it a good opportunity to invest another small tranche in Broadcom. Overall, the virus has not changed Broadcom's fundamental position.
(Source: Broadcom at a glance)
The fact that the company is a growth engine (also favored by M&A activities) has not changed:
Data by YCharts
The company has now even managed to further diversify its own business and, in particular, strengthen its software business. This is one of the reasons why Broadcom has also acquired Symantec Enterprise Security Business for more than USD 10 billion. I expect this to further increase Broadcom's profitability in the future because the software business is less cyclical and fundamentally more profitable than the semiconductor business. But even so, Broadcom is quite profitable and can show a stable margin (EBIT Margin: 16.24 percent; EBITDA Margin: 44.32 percent; Profit margin: 14.66 percent). The gross margin, in particular, has developed outstandingly well:
(Source: Gross margin)
Broadcom also has the highest dividend yield among its peers. With a payout ratio of 56 percent and a yield of almost 5 percent, Broadcom is a good play for cash flow orientated investors. It is also to be expected that Broadcom will increase its dividend considerably in the coming years, although I do not expect it to remain as high as it has been in recent years:
(Source: Dividend history)
The uncertainties only make a good company even cheaper
In this respect, Broadcom is still the same company as before the outbreak of corona epidemics. But due to the worldwide slump in share prices, I get this company at a much lower price. With a forward P/E ratio of 10.86 percent, the company is not expensive.
Data by YCharts
A comparison of the price per share with the cash flow per share also reveals that the company is trading far below its historical average. This comparison method is particularly appropriate because the development of cash flow was relatively stable and less volatile, such as profit. Both the median of the last three years and the median of the last 5 years reveal that the company is trading at a high discount at the moment:
Data by YCharts
Is Broadcom a falling knife?
One problem with an investment at this stage is, of course, obvious, and that is the danger of reaching into a falling knife. The proper way to deal with this problem is solved by itself with the mindset described above. It is impossible to time the market, and nobody can seriously say how things will develop. If in December, when Broadcom increased its dividend by more than 20 percent, you were still thinking how great it would be to have bought Broadcom as early as 2017, then don't ask yourself now whether Broadcom will lose another 10 percent. That may be, but we don't know. Just as well, the current prices could also turn out to be possible historical lows for the next few years. So far, it has gone up again after every crash. It was unfortunate not for those who invested too early, but for those who waited too long.
(Source: The opportunity lies in the long term)
I am more of a risk-averse investor. That is why it is advisable to buy in several tranches to take advantage of the cost average effect. Either way, I think one should make use of phases like the current one and buy cheaply.
Conclusion
Investors tend to mourn when prices fall and say: "Prices are now back at the level of x years ago. These years have been wasted years." I think that's the wrong mindset. These price resets are a gift for long-term investors. With the fresh capital, they can use this window opened by the price drops, travel back in time, and increase their initial base. However, careful due diligence is also required here. The fundamental basis of the company must remain, and the previous investment thesis must be unchanged as well. If this is the case, as here at Broadcom, investors should be grateful. To avoid the risk of falling knives, a gradual approach with several tranches is recommended.
Broadcom is part of my diversified retirement portfolio. If you enjoyed this article and wish to receive other long-term investment proposals or updates on my latest portfolio research, click "Follow" next to my name at the top of this article, and check "Get email alerts."
