Commscope Holding Company Inc (NASDAQ:COMM) has seen a jump in number of bullish hedge fund positions during the first quarter. There were 35 hedge funds with bullish positions in COMM at the end of first quarter vs. only 27 hedge funds with bullish positions at the end of 2014. In this article we will share Corsair Capital’s views on Commscope Holding Company Inc (NASDAQ:COMM). But first, let us explain why we even care about what hedge funds think about these stocks.
Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that hedge funds’ long positions actually outperformed the market. For instance the 15 most popular small-cap stocks among funds beat the S&P 500 Index by more than 80 percentage points since the end of August 2012. These stocks returned a cumulative of 135% vs. 55% gain for the S&P 500 Index (read the details). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).
Corsair Capital talked about its COMM position in its 2015 Q1 investor letter. We like Corsair Capital because Corsair Select fund delivered a net return of 13.6% annually since its inception at the beginning of 2004. S&P 500 Index returned only 7.9% during the same period. Corsair Select also returned 6.1% during the first quarter, outperforming the S&P 500 by more than 5 percentage points. Here is what they said:
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“CommScope (“COMM”) rose 25% in the quarter. The outperformance was driven by the announcement in January that the company will merge with competitor TE Connectivity’s (“TEL”) Telecom, Enterprise and Wireless businesses by year-end 2015. This transformational combination will diversify COMM’s revenue from both a geographical and a cyclical perspective, provide significant synergy opportunities, and should be more than 20% accretive to COMM’s adjusted earnings per share in year 1 alone. We believe that pro forma free cash flow could ramp to $4.00 per share in 2017 and that the company could rapidly de-lever its balance sheet to 2.5x Net Debt/EBITDA by 2017 (from 4.5x today). Our view is that the stock will experience a re-rating of its multiple when the merger closes and as it executes its plan of capturing synergies and paying down debt. Valuing COMM at 12x 2016 EBITDA less CapEx (the peer average), we get a valuation of $50 per share. COMM stock ended the quarter at $28.54.”
To be perfectly clear, these views diverge from what sell side analysts think about COMM. Here is what Credit Suisse analysts Kulbinder Garcha, William Chu, and Sami Badri said about Commscope after the company’s earnings release:
“EPS beat expectations coming in at $0.42 versus CS estimates of $0.37, while guidance for Q2 was a touch weaker than anticipated. We maintain our PT of $33 and our FY15/16 EPS of $2.00/$2.10. While operationally we do not believe CommScope will see revenue growth return until 2H15, we do believe that the company can outperform the cyclical wireless infrastructure slowdown over time. Beyond this we believe the TE Connectivity deal changes the equity story for the better and will prove highly accretive to EPS over time.”
Keeping this in mind, we’re going to take a peek at the key action encompassing Commscope Holding Company Inc (NASDAQ:COMM).
How are hedge funds trading Commscope Holding Company Inc (NASDAQ:COMM)?
At Q1’s end, a total of 35 of the hedge funds tracked by Insider Monkey were bullish in this stock, a change of 30% from the previous quarter. With hedgies’ sentiment swirling, there exists a select group of noteworthy hedge fund managers who invested large sums into the stock.
Maverick Capital, managed by Lee Ainslie, holds the biggest position in Commscope Holding Company Inc (NASDAQ:COMM). Maverick Capital has a $332.8 million position in the stock, comprising 5.4% of its 13F portfolio. The second most bullish hedge fund manager is Chieftain Capital, led by John Shapiro, holding a $260.8 million position; 14.2% of its 13F portfolio is allocated to the stock. Some other peers that hold long positions contain Peter Adam Hochfelder’s Brahman Capital, Christopher Lord’s Criterion Capital and William Duhamel’s Route One Investment Company.
With a general bullishness amongst the heavyweights, specific money managers were breaking ground themselves. Criterion Capital, managed by Christopher Lord, initiated the most outsized position in Commscope Holding Company Inc (NASDAQ:COMM). Criterion Capital had $123.7 million invested in the company at the end of the quarter. William Duhamel’s Route One Investment Company also made a $60.4 million investment in the stock during the quarter. The other funds with new positions in the stock are Jim Simons’s Renaissance Technologies, Steve Cohen’s Point72 Asset Management, and Howard Shainker and Akiva Katz’s Bow Street LLC.
Overall, we side with Corsair Capital and other hedge funds. We think the upside in COMM is much more than Credit Suisse’s $33 price target. We believe COMM is likely to outperform the market in the next 18 months.
