Happy 2017: Stock Advice to Be Aware of

Proj Omni: Dec 31, '16

Happy 2017!  We wish you to become healthier and wealthier this year. 

To prosper in 2017, you may want to be extra careful about speculative stock advice you’re constantly bombarded with, even from reputable media sources.  See the snapshot from Google News below--so many stocks to buy in 2017? 

We don’t necessarily think so.  Here is an example--CNN Money lists Broadcom (AVGO) is one of the top stocks to invest in 2017, fueled by a recommendation from Ross Seymore from Deutsche Bank.  We took a broader look at Broadcom, and realized that it gained quite a bit of value in 2016: 25%, which is roughly 15 percentage points above the S&P 500 return.  Since the stock overperformed the market, you’re wondering if the pendulum might swing back and the stock will decline.

First, there are some things we find attractive about Broadcom--it’s a key player in wireless technology, and the company has trimmed costs and beat street expectations, which resulted in a relatively high stock return for 2016.  Also, the Price/Equity ratio (as a measure of whether the stock is valued aggressively or modestly) is relatively low compared to its competitors.   

But there are a few things that make us worried about this stock.  First, Broadcom is not profitable--with its trailing 12-month profit margin of -13%, it ranks in the bottom quintile vs. the industry competitors (Qualcomm, for example, has 24% trailing 12-month profit margin, and most industry competitors are profitable).      

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The next thing that jumps out of us is the cash position vs. the debt.  Broadcom has enough cash to cover only 23% of its debt.  The average competitor from the same industry (semiconductors) has enough cash to cover more than half of its debt (53% more precisely).  

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Next--one metric that’s often used to evaluate a company’s potential value in case of an acquisition is enterprise-value-to-revenue ratio.  A low ratio may imply that a company is a cheap acquisition target (if acquired at the current share price).  Conversely, a high ratio may signal an expensive acquisition target.  Broadcom’s enterprise-value-to-revenue ratio is the highest in the industry--it’s 60% higher than Qualcomm’s.      

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We made the points above to illustrate that for every reason to invest, you can find two or three reasons not to invest in any given stock.  The final decision has to be your own--and don’t allow others to overpower your own thought process.  There is no such thing as a sure bet, and ‘star’ investors’ recommendations may be as good as anyone else’s.     

To do your own due diligence before investing in stocks, take a look at Finstead Insights and see what jumps out of you--perhaps some green lights or some red flags.  As a general rule, we won’t be recommending stocks--we’ll leave that privilege for others--and will continue to make sure you’re getting both positive and negative perspectives about individual companies (or securities), as you continue to develop your own investment theses and figure out what investments are right for you.   

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