We recently compiled a list of the 8 Best Momentum Stocks To Invest In Right Now. In this article, we are going to take a look at where Broadcom Inc. (NASDAQ:AVGO) stands against the other momentum stocks.
U.S. Labor Market Remains Resilient
After the Fed’s rate cut and a positive inflation report, the latest jobs report also showed better-than-expected results. In an interview with Yahoo Finance, Elise Gould from the Economic Policy Institute discussed the latest employment data as she highlighted the continued strength of the U.S. labor market.
Payroll employment increased by 254,000 in September, with revisions adding 72,000 jobs from previous months. The unemployment rate remained stable at 4.1% and showed declines among various demographics, especially among men.
Gould emphasized that the prime-age employment-to-population ratio is at a 23-year high, which shows a strong economy. Despite wage growth reaching 4%, she downplayed concerns that this could lead to inflation and mentioned improvements in productivity and a low labor share of corporate income.
She expressed confidence in the labor market’s strength and suggested that it may influence the Fed’s decisions on interest rates. She also believes that the Fed should normalize rates, which remain high historically given current employment levels.
Gould observed that the overall labor market is strong, but not excessively heated, as shown by softer job turnover rates.
Economic Resilience and Its Impact on the Stock Market
At CNBC’s Closing Bell, Wharton finance professor Jeremy Siegel discussed the impact of the recent economic data on the stock market. He noted that while 550,000 jobs were added in the third quarter, wages remained flat, leading to a GDP growth projected at 2.5% to 3%.
Siegel believes that the Federal Reserve will likely implement smaller rate cuts of 25 basis points rather than larger cuts and will aim for a long-term neutral rate of about 3.5% by the second half of next year.
He expressed optimism regarding the stock market and suggested that the S&P 500 could reach 6,000 by year-end. However, he mentioned that higher yields may present challenges.
Despite concerns about equity valuations appearing high, Siegel pointed out that with cash still abundant and a resilient economy, the market remains attractive. He acknowledged that while the forward earnings ratio for the market is around 21.5x, it is not expensive in the current economic climate. He emphasized the absence of recession indicators and the potential for earnings growth and suggested that while significant market gains may not be expected, there is still room for growth.
Our Methodology
For this article, we looked at the October 2 holdings of iShares MSCI USA Momentum Factor ETF and narrowed our list to 8 stocks most widely held by institutional investors. The best momentum stocks to invest in are listed in ascending order of their hedge fund sentiment which was taken from Insider Monkey’s database of over 900 elite hedge funds.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A technician working at a magnified microscope, developing a new integrated circuit.
Broadcom Inc. (NASDAQ:AVGO)
Number of Hedge Fund Holders: 130
Broadcom Inc. (NASDAQ:AVGO) is a California-based company that designs, develops, manufactures, and supplies semiconductor and infrastructure software products globally. The company has a foot in a range of industries and works on solutions for broadband Wi-Fi AP, data centers, financial services, enterprise security, broadband access, and automotive.
The company has products ranging from networking devices and optical technologies to enterprise security software under the Symantec brand. In 2023, it completed the transaction to acquire cloud computing and virtualization technology company, VMware LLC. According to Broadcom (NASDAQ:AVGO), its infrastructure software segment, which is largely fueled by VMware’s performance, generated $5.8 billion in revenue in fiscal Q3, representing a 200% increase compared to the previous year.
The company highlighted that VMware’s transformation is progressing well, with significant growth in VMware Cloud Foundation bookings, representing 80% of VMware products booked in the quarter. This resulted in an annualized booking value of $2.5 billion, up 32% from the prior quarter.
The company’s overall Q3 earnings show strong growth and resilience in the face of market fluctuations. It achieved consolidated net revenue of $13.1 billion, a remarkable 47% increase year-over-year, with an operating profit of $7.9 billion, up 44%.
Broadcom (NASDAQ:AVGO) projects Q4 revenue of approximately $14 billion, which would be a 51% increase year-over-year, and forecasts adjusted EBITDA to reach 64% of revenue. These results show its strategic positioning in high-demand markets, especially in AI and infrastructure software.
It is the 2nd best momentum stock on our list and is also one of the most important AI stocks according to BlackRock. It is quite popular among institutional investors as recently Mar Vista Investment Partners said in its Q2 investor letter that the company is positioned to capitalize on the rising demand for custom AI accelerator chips in the generative AI sector. As the second-largest manufacturer of these chips after Nvidia, it specializes in custom AI ASICs and serves major hyper scalers like Alphabet and Meta, who appreciate its performance and cost efficiency. The company is expected to benefit from a multi-year capital cycle as hyperscalers invest in AI infrastructure.
Additionally, Parnassus Investments stated the following regarding Broadcom Inc. (NASDAQ:AVGO) in its Q2 2024 investor letter:
“During the second quarter, the Fund’s overweight position in the Information Technology sector decreased slightly as we sold our position in Cisco Systems and used most of the proceeds to buy Broadcom Inc. (NASDAQ:AVGO), a leading semiconductor company and provider of custom silicon products. Both stocks provide similar exposure to networking technology, but we believe Broadcom offers more upside from AI infrastructure spend and defensiveness due to its software assets.
Broadcom, a leader in semiconductor and infrastructure software, offers promising AI upside via data center ethernet and custom ASICs and can benefit if the iPhone’s new AI features gain traction this year. Additionally, the strength of its enterprise software assets in VMware, Symantec and CA Technologies could provide defensiveness if enterprise IT spending continues to be muted.”
Overall AVGO ranks 2nd on our list of the best momentum stocks to buy. While we acknowledge the potential of AVGO as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AVGO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.