We recently published a list of Renaissance Technologies Portfolio: 10 Best Stocks To Buy. In this article, we are going to take a look at where Broadcom Inc. (NASDAQ:AVGO) stands against the other best stocks to buy which are part of the Renaissance Technologies portfolio.
Renaissance Technologies is an American hedge fund that specializes in systematic trading and employs statistical and mathematical tools to drive its investment programs. As of March 2024, the fund managed discretionary assets over $89 billion, according to their Form ADV. It was founded in 1982 by Jim Simons, a mathematician who worked as a code breaker for the US National Security Agency during the Cold War.
Simons is considered among the pioneers of quantitative investing. At the time of his death in May 2024, he had an estimated net worth of $31.4 billion, making him the 51st richest person in the world. His use of mathematical models and algorithms to drive long-term investment returns earned him a legacy that rivaled the likes of Warren Buffet and George Soros.
His signature Medallion generated average annual returns of 66% for three decades between 1988 and 2018, earning more than $100 billion in profits during the period. The fund started with charging a 5% fixed fee and also had performance charges of 20%, which were later increased to 44% in 2002. Despite those cuts, Medallion earned annual returns of around 39% on average.
The fund was closed to outside investors in 1993 and has since then only been available to past and current employees, and their families. Renaissance Technologies does have other funds that are open to outsiders, such as Renaissance Institutional Equities Fund (RIEF) and Renaissance Institutional Diversified Alpha (RIDA).
Simons stepped down from active management of Renaissance Technologies in 2010 and resigned as its executive chairman in 2021. Peter Brown is the current CEO of the capital market company. He graduated with a B.A. in Mathematics from Harvard University and also holds a Ph.D. in Computer Science from Carnegie Mellon University. Brown’s father, Henry B.R. Brown, invented the Reserve Primary Fund in 1970, which was the first money market fund to be set up.
Brown is committed to the use of mathematical models to discover and unlock the value of stocks in the market. However, Renaissance hedge funds that are open to outside investors have been shrinking for some while. According to a recent report in the Financial Times, RIEF currently manages around $19.6 billion, significantly down from $35.8 billion in 2020. The collapse of RIDA and Renaissance Institutional Diversified Global Equities (RIDGE) has been even worse. The two funds were merged this year. In 2019, RIDA managed about $15 billion, while RIDGE had a portfolio of $14.3 billion. Today, the combined fund manages only $3.6 billion.
As a result, Renaissance’s external assets under management have declined from $65.1 billion in 2019 to $23.2 billion today. Much of the exodus happened following the coronavirus pandemic and was driven by a shock performance by the hedge fund as the stock market rattled. In contrast, the Medallion Fund, which is limited to past and current employees, gained 76% in 2020 despite Covid-19. This is because the fund indulges in high-frequency trading with a lower capacity, a strategy that is strikingly different from those applied for external funds.
However, the performance of external funds is beginning to stabilize after the lows over the last few years. RIEF is up 19.8% this year, while RIDA has also gained 17.4%. Though financial experts believe the improvement is owed more to the fund’s performance, rather than flows.
Methodology
We scanned Renaissance Technologies’ 13F portfolio, as of June 30, 2024 and picked the top 10 stocks according to their stake value. The figures were sourced from Insider Monkey Database.
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)
Stake Value as of Q2 2024: $472,213,011
Broadcom Inc. (NASDAQ:AVGO) is a leading developer, manufacturer, and supplier of semiconductor and infrastructure software products. The company is headquartered in Palo Alto, California. It offers a wide range of products and services, including wireless chips, AI networking solutions, and other related accessories for 5G-compatible smartphone manufacturers. Broadcom also sells optical components to companies in the automotive and industrial space.
The company’s diverse revenue stream ensures that it earns hefty revenues across quarters, and this has provided it a major competitive edge in the semiconductors industry. During Q3 2024, revenue increased 47% year-over-year to a total $13.1 billion for the quarter. Profit also surged 44% compared to the same period last year, which enabled the company to post an EPS of $1.24, which beat analysts’ expectations of $1.22 per share. The strong results were driven by a significant increase in AI revenue, the stabilization of non-AI semiconductor sales, and ongoing acceleration in VMware bookings.
Broadcom Inc. (NASDAQ:AVGO) acquired cloud computing company, VMware, in November last year. This is already yielding positive results through increased revenue in the infrastructure software segment. During Q3, the segment generated $5.8 billion in revenues, up 200% from the previous year. Of this, $3.8 billion was contributed by VMware. Investors are confident that the integration of VMware will drive further growth in the company in the times ahead. Mar Vista Focus strategy stated the following regarding Broadcom Inc. (NASDAQ:AVGO) in its Q2 2024 investor letter:
Broadcom recently acquired VMware, the leader in virtualization software targeting the enterprise market. The integration of VMware is tracking ahead of plan as management has simplified its product bundles, transitioned to a subscription revenue model, and reduced operating costs. We believe this simplified go-to-market structure will result in strong top-line revenue growth and expanding operating margins. We believe Broadcom will compound intrinsic value per share in the mid-20% range over the intermediate term as it benefits from the AI-infrastructure build-out, a cyclical recovery in its legacy semiconductor business, and modestly accelerating growth from its infrastructure software business as VMware is successfully integrated.
Broadcom ended Q3 with $10 billion in cash, which has further fueled bullish sentiment around the stock. The company is also actively striving to address its debt, and as part of these efforts, replaced $5 billion of floating rate notes with new fixed senior notes and used proceeds from the sale of VMware’s End-User Computing business to lower the floating rate by another $4.2 billion. On the other hand, reports of the company being in negotiations with ChatGPT-maker, OpenAI, on the development of a new artificial intelligence chip have also bolstered optimism among investors.
While the expectation of a dip in consolidated gross margins during Q4 due to a higher revenue mix of semiconductors has resulted in concern in some sectors, the overall outlook for the company is positive. There is consensus among Wall Street analysts on the stock’s Strong Buy rating, with a share price upside potential of 9.5%.
During the second quarter of this year, Renaissance Technologies amplified its portfolio by acquiring 294,115 shares of Broadcom Inc. (NASDAQ:AVGO), valued at over $472 million. The company now makes up about 0.8% of the hedge fund’s portfolio, making it one of the best stocks to buy from the Renaissance Technologies portfolio.
Overall, AVGO ranks 9th among the Renaissance Technologies Portfolio: 10 Best 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.