Avago Technologies (NASDAQ:AVGO) is a Singapore-based semiconductor components maker that just boosted its revenue forecast and enjoyed a 10% pop in its stock price Wednesday. Does this make it a good addition to your investment portfolio?

The 10% rally in its market value is the most since its August 2009 initial public offering. On Wednesday, it announced that its fourth-quarter revenue could be $633.2 million — about $12 million more than the average analyst estimate. That $3.23 rise in Avago’s stock price (on 247 million shares outstanding) represents a $66.30 increase in Avago’s market value for every dollar ahead of fourth-quarter sales expectations.

Is that big rise too much to make Avago shares a good investment? Here are three reasons that you might still consider buying the stock:

• Great earnings reports. Avago has been able beat analysts’ expectations without fail and has done so in all of its past five earnings reports.
• Increasing sales and profits and cash-rich balance sheet. Avago has been increasing sales and profits. Its revenue has grown at a 10.7% annual rate, from $1.4 billion (2006) to $2.1 billion (2010), while its net income has increased from -$227 million (2006) to $415 million (2010) — yielding a very high 20% net profit margin. It has a mere $4 million in debt, and its cash rose at a 19.8% annual rate, from $272 million (2006) to $561 million (2010).
• Out-earning its cost of capital. Avago is earning more than its cost of capital — and it’s progressing well. How so? It’s producing EVA momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first six months of 2011, Avago’s EVA momentum was 6%, based on first nine months’ annualized 2010 revenue of $2 billion, and EVA that rose from $259 million in the first nine months’ annualized 2010 to $384 million in the first nine months’ annualized 2011, using a 9% weighted average cost of capital.

One reason to avoid Avago:

• It has a high valuation. Avago’s price/earnings-to-growth ratio of 2.96 (where a PEG of 1.0 is considered fairly priced) means its stock price is very expensive. It currently has a P/E of 14.8, and its earnings per share are expected to grow 4.99% in 2012.

Based on valuation, I would avoid this stock for now; however, if the price drops on a broad market break, this is one I would look to buy.

Peter Cohan has no financial interest in the securities mentioned.