Longleaf Partners Fund, a Memphis-based fund under Southeastern Asset Management, published its “Longleaf Partners Fund” third quarter 2021 investor letter – a copy of which can be downloaded here. Longleaf Partners Fund fell 5.70% in the third quarter, while the S&P 500 Index returned 0.58%. The Fund remains ahead of the index year-to-date (YTD), up 16.38% vs. the S&P’s 15.92%. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.
Longleaf Partners Fund, in its Q3 2021 investor letter, mentioned Lumen Technologies, Inc. (NYSE: LUMN) and discussed its stance on the firm. Lumen Technologies, Inc. is a Monroe, Louisiana-based telecommunications company with a $14.5 billion market capitalization. LUMN delivered a 45.85% return since the beginning of the year, while its 12-month returns are up by 44.37%. The stock closed at $14.22 per share on November 12, 2021.
Here is what Longleaf Partners Fund has to say about Lumen Technologies, Inc. in its Q3 2021 investor letter:
“The best news and the biggest market reaction surprise in the quarter was at our largest holding Lumen. After much engagement with Southeastern following our amended 13D filed last December, the company announced that it was selling two assets – the slowest growth part of its legacy copper landline business in 21 states in the US and the Latin American (therefore highest discount rate / lowest multiple) part of its enterprise fiber business. At a time when the company was trading at 5.5x EBITDA (earnings before interest, taxes, depreciation and amortization) for all its assets, it sold the legacy landline assets (i.e., the lowest multiple part of its lowest multiple business) for that same 5.5x and the Latin American assets (i.e., the lowest multiple part of its higher multiple business) for 9x. The absolute amount of gross proceeds was almost equal to the company’s market cap. We believe the remaining legacy assets are worth greater than 5.5x and the remaining fiber/enterprise assets are worth greater than 9x, especially because infrastructure funds have recently paid midteens multiples for similar fiber assets. Thus, we now have a higher quality, higher growth, lower leverage mix of assets at Lumen. But when this news was announced, Lumen’s stock price initially went down, due to weak communications around future growth and capital allocation on the conference call. This communication failure can be fixed much more easily than a business failure, and we were encouraged that the company authorized a share repurchase to take advantage of the market’s short-term misunderstanding. The stock price stabilized and increased as the quarter went on (although two annoyingly-timed, negative sellside reports hit the stock on September 30), but there is still an enormous gap between price and (growing) value.”
Photo by Mika Baumeister on Unsplash
Based on our calculations, Lumen Technologies, Inc. (NYSE: LUMN) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. LUMN was in 33 hedge fund portfolios at the end of the first half of 2021, compared to 32 funds in the previous quarter. Lumen Technologies, Inc. (NYSE: LUMN) delivered a 17.62% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.
