Here is the three bullet point thesis (portfolio managers can’t handle any more than that due to intense ADD):
- Trades at a 9% free cash flow yield so it is very cheap.
- Margins will improve as they shut down unprofitable baseband business so numbers on the street are too low.
- BRCM management has been rumored to say that at the right price they will sell the company while INTC said on their last CC that connectivity is important strategically for them (70% of BRCM’s business is connectivity). I suspect that this company will be bought in the next 6-18 months as the semiconductor industry is in consolidation mode.
The stock also has been acting like a champ of late and was one of the only stocks up on Thursday in the big sell off. This is a classic offense/defense play for large long only’s or hedge funds in what I think will become an increasingly difficult tape. The stock has a beta of .91, is cheap and has a potential M&A bid underneath it so in a bear market this will outperform handsomely. If the stock is taken out I have a $55 price target which is an 8% free cash flow yield on the improved cash flow excluding the baseband business. That is a 44% potential return. I like the risk reward here.
This stock is a very good way to add idiosyncratic risk to your portfolio without adding beta. Enjoy the profits.
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Muchas gracias, Señor Bluestar
Hey Bluestar, I’d be interested in reading more insight from your days as a fund manager. That’s a perspective others here may not have as much. For example, it would be interesting to read comments on what the big money crowd is “doing” and why regardless of whether you think they’re wrong. While many retail traders that trade five digit accounts seem to think that people running the big money (billions and trillions) are stupid and they know better, I tend to think that big money acts more logically and less emotionally, though I understand the system doesn’t provide incentives for them to outperform given the penalty of under performing. Regardless if that’s wrong, it would be nice it you could bring some of that big money perspective to your column. That would be useful to people even if they disagree with your market opinion.
Bluestar
I had a question. Is there a source that most institutional investors use that they accept universally for beta? I ask and I am not doubting you because you said BRCM has a beta of 0.91. That is what yahoo finance says also. CNBC.com says BRCM has a beta of 1.22. Finviz.com says BRCM has a beta of 1.12. Do you know off hand why there is a discrepancy? Many thanks!
ctb007,
I saw another beta of .81. Lets call it 1. For a point of reference Yelp has a Beta of 2.79. basically brcm is a market stock with an upside option and support underneath.
Thanks Bluestar!
Trader X
Sure let me think about that. Look at my new post. Smart big money is already in lots of cash. Mutual fund guys are hopelessly screwed.
Solid post bluestar, this is much more value added then the “short the market because the fed is manipulating everything” type of post.