David Simon’s second stock pick is LIBERTY GLOBAL PLC (NASDAQ:LBTYK). Here is what he said:
“We’re fans of LIBERTY GLOBAL PLC (NASDAQ:LBTYK). It’s incorporated in London and trades here. They just acquired Virgin Media. The negative news today was that they made a bid for a German cable company while they were supposed to do a $3.5 million share buyback.
We think John Malone’s philosophy is “Buy as much as you can now because interest rates are so cheap, then lock in your rates and own as much as you can,” because he’s very good with taxes and everything. The acquisition of Virgin Media increases the free cash flow of LIBERTY GLOBAL PLC (NASDAQ:LBTYK) to the tune of 12% to 15% a year for at least 4-5 years, which is amazing.
Malone should pay down debt or whatever he wants and if he buys this other German cable company, he’ll control basically almost all of Germany because it’s contiguous to his other German companies. It’s the biggest cable operator in Europe and Europe’s growth rate in cable is probably over double what it is here. Attrition rates are much lower and telephony penetration is much lower. So, there’s more opportunity there.
… but there are also different classes. There’s Liberty A, Liberty C, also called Liberty K, and then there is the super voting stock, Liberty B which is what Malone owns. To us, Liberty K is the one to own if it’s more than a 3% discount to Liberty A. Liberty K doesn’t get any votes and Liberty A gets one vote, but the super voting stock gets 20 votes. If there’s a takeover, K would get the exact same price as A. There’s a strong probability that Vodafone Group Plc (ADR) (NASDAQ:VOD) might buy all of Liberty if they sell their Verizon stake. That’s something lurking out there as well.”
We pressed David Simon for a third long-term investment idea and here is what he picked:
“There’s a mortgage REIT called Chimera. The symbol’s CIM. It’s trading about $3.01 to $3.02. We believe they’re going to issue 3 more dividends at $0.09 in the next three quarters, which basically brings your price down to around $2.75. We believe the book value is somewhere between $3.00 and $3.10. These companies tend to get taken over for 110% to 120% of book value. We think that the former parent will want to buy them for 10% above book. So, there’s a rate of return play. You could buy this for $3.02, you get 3 dividends, and you’d probably get around $3.30-$3.40 in a takeover. So, you make $0.50 on a $3.00 investment in a short period of time.”
One thing we agree with hedge fund skeptics in the media is that it is time to get out once a hedge fund becomes too big and starts investing in mega-cap stocks like Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT) or JPMorgan Chase & Co. (NYSE:JPM) because on the average they won’t be able to beat the market by a large enough margin to justify their high fees and deliver strong alpha for their investors. However, there are a lot of opportunities for investors who are willing to take a closer look at smaller but talented hedge funds that invest in smaller cap stocks. David Simon is one of these hedge fund managers and we believe his stock picks will outperform the market on the average.
Disclosure: The author is long AAPL, MSFT, and VOD.
