Below is the performance of the six stocks from our August 9, 2013 Nasdaq 100 watch list (found here) compared to the Nasdaq 100 Index gain of +24.41% over the last year.
|^NDX||Nasdaq 100 Index||+24.41%|
The watch list underperformed the Nasdaq 100 by -10.41%. However, the stock that we had a strong interest in, Broadcom (BRCM), garnered the following commentary:
"Broadcom (BRCM) tops our list this week and it is the stock that interests us the most, at the moment. Right off the bat, we see that the stock has a price to book (P/B) ratio of 1.93. Among the listed companies above, this is a compelling attribute. Value Line Investment Survey says that the fair value for BRCM is 12 times cash flow. Based on full year cash flow figures for 2012, BRCM is estimated to be fairly valued at $39.96 or +53% above to current price.
"Of concern with the data presented by Value Line is the fact that BRCM went from debt free in 2009 to nearly 15% of capital, as of the most recent reporting. In one sense, corporate borrowing at low rates is a good thing. However, we're concerned that certain types of borrowing result in loss generating (is that possible) ventures that end up going nowhere.
"Broadcom has recently been slammed in the market based on reduced or declining guidance. This from Investopedia.com:
'A lot of what has worried Broadcom analysts and investors appeared to come home to roost with the company's latest earnings report. Weak guidance has investors fearing that the company is losing more and more share to Qualcomm (NASDAQ:QCOM), with an overall stagnation in high-end devices leading to fears that ASPs and margins are in danger. (Stephen D. Simpson. "Fear Dominating the Broadcom Story". Investopedia. July 29, 2013. accessed August 10, 2013.link).'
"Dow Theory has the following downside targets:
"When we ran Edson Gould's Speed Resistance Lines, we were only able to come up with an extreme downside target of $15.78. It seems that the $24.43 target is highly achievable."
On August 12, 2013 (one trading day later), our downside target of $24.43 was achieved on an intraday basis as BRCM declined as low as $23.25. After hitting our target low, BRCM trended higher to the tune of nearly +50% gains.
It should be noted that in the 2013 article cited above, investors and analysts were fearful due to anticipated lower profit margins. Please note that the NLO team does not operate by the maxim "be fearful when others are greedy and greedy when others are fearful" as made famous by Warren Buffett. Instead, we think in terms of the words of Dow Theorist William Peter Hamilton, the fourth editor of the Wall Street Journal, when he said the following:
"The best way of reading the market is to read from the standpoint of values. The market is not like a balloon plunging hither and thither in the wind. As a whole, it represents a serious, well-considered effort on the part of farsighted and well-informed men to adjust prices to such values as exist or which are expected to exist in the not too remote future. The thought with great operators is not whether a price can be advanced, but whether the value of property which they propose to buy will lead investors and speculators six months hence to take stock at figures from ten to twenty points above present prices.
"In reading the market, therefore, the main point is to discover what a stock can be expected to be worth three months hence and then to see whether manipulators or investors are advancing the price of that stock toward those figures. It is often possible to read movements in the market very clearly in this way. To know values is to comprehend the meaning of movements in the market."
Source: Hamilton, William Peter. Stock Market Barometer. Page 38.
At the current price, Broadcom almost appears expensive when considered from where we thought investors should take an interest. However, on August 1, 2014, widely followed market commentator and analyst Charles Payne came out with an article titled "Is It a Good Time to Buy Broadcom?" According to Mr. Payne Broadcom is a compelling buy at the current price with an upside target of $47. We believe that our work has adhered to the recognition of values as outlined by Charles Dow and reiterated by William Peter Hamilton.
We consider ourselves value investors. This means buying stocks at intrinsically low valuations and never selling, regardless of market conditions. In theory, individuals who sell stocks in periods from several days to 10 years are considered traders. However, a different reality pervades our market experience. Lacking a vast pool of resources, we can only operate with an eye for values and downside risk. For those with a similar reality, we can only advise the best scenario that would ensure that the pool of investment resources is guarded against buyers remorse. With this in mind and the nearly +50% gains in BRCM, we recommend selling only the principal while letting the profits compound into perpetuity. This is our only remedy to dealing with our own personal fear of loss. We hope this will prove useful to others.
Disclosure: The author is long CHRW.