“We don’t buy things when they’re pretty,” says Anthony Lombardi, co-manager of the $3.6 billion Delaware Value Fund. He tempers his contrarianism by picking companies with commanding market share and sound balance sheets. Result: 17% average annual returns over the past five years, putting the fund in the top 7% of its cohort. Recently the fund has been trolling the lagging tech sector. One new 2013 holding is chipmaker Broadcom.
1. Its chips are everywhere
Lombardi started buying shares before Broadcom announced a second-quarter loss, which pummeled the stock. He then bought more. Why? The hit was largely caused by a goodwill write-down from a smart 2012 acquisition, he says. Meanwhile, Broadcom chips dominate in modems, cable boxes, Wi-Fi, Bluetooth, and GPS. “There’s an insatiable appetite for everyone to be connected 24/7 everywhere they go,” he says. “Broadcom products are at every touch point in every device and every piece of infrastructure.”
2. A plan for its weakest area
Broadcom’s one obvious weakness, Lombardi says, involves so-called 4G baseband signal processors, which connect mobile devices to networks. The company controls only 3% or 4% of that market, vs. Qualcomm’s 50% to 70%. But Broadcom has been spending heavily to develop baseband chips, Lombardi says, and a recent acquisition is speeding that process toward a 4G rollout in early 2014. If it can move its market share into double digits, he says, Broadcom will significantly boost its profits.
3. Cyclical trends are promising
The sluggish economy has hit Broadcom’s infrastructure and networking business the hardest, as telecom carriers and service providers slowed their capital expenditures. But that trend is turning, Lombardi says: “We’re starting to see all the major telcos ramping up their cap-ex rates.” That’s crucial because infrastructure and networking generates 30%-plus margins for Broadcom. “You start getting a bubbling up in terms of capital expenditure and IT spending,” he says, “and this becomes a real leverage point for the company.”
4. Big potential, limited risk
All this adds up to a stock that could rise from $27 to above $50 over five years, Lombardi contends. In the unlikely event that the wheels fall off every piece of the business, he says, shares could drop below $20. But if Broadcom’s investments pay off even modestly and telecom expenditures remain on their current trajectory, he expects double-digit revenue and earnings growth. “Broadcom has shown it can deliver,” he says, “and the secular dynamics, with everyone wanting to connect all the time, are a wind at its back over the next three to five years.”
This story is from the November 18, 2013 issue of Fortune.
