Madison Funds Sees A Great Opportunity in Liberty Broadband (LBRDA)

Madison Funds, an independent investment management firm, published its fourth quarter 2020 “Madison Mid Cap Fund” investor letter – a copy of which can be downloaded here. A return of 15.54% was recorded by the fund’s Class Y shares in the fourth quarter of 2020, below its Russell Midcap benchmark that delivered a 19.91% return in the same period. You can view the complete list of the fund’s Average Annual Total Returns and its top 5 holdings to have a peek at their top bets for 2021.

Madison Mid Cap Fund, in their Q4 2020 investor letter, mentioned Liberty Broadband Corporation (NASDAQ: LBRDA) and emphasized their views on the company. Liberty Broadband Corporation is an Englewood, Colorado-based communications business that currently has a $29.9 billion market capitalization. Since the beginning of the year, LBRDA delivered a -6.07% return, while its 12-month gains are still up by 37.04%. As of March 26, 2021, the stock closed at $148.02 per share.

Here is what Madison Mid Cap Fund has to say about Liberty Broadband Corporation in their Q4 2020 investor letter:

“Our largest investment by weighting, Liberty Broadband, was also one of our best contributors in 2020. We have owned the company for five years, and remain big fans. It’s a holding company whose primary asset is a large stake in Charter Communications. Charter is the second largest cable company in the U.S., and while it won’t catch up to number one Comcast anytime soon, we like that Charter is a pure play cable distributor, and hasn’t diversified into other media and media content like Comcast has. It’s a contrast in strategy – we don’t necessarily know for sure that Charter’s strategy is better, but the focus does make it easier for us to know what we own.

Two things of significance happened in 2020 for Liberty Broadband. In the second quarter, residential high-speed internet revenues, a.k.a. “broadband,” at Charter exceeded residential video revenues for the first time ever. This is notable, because a pillar of our investment thesis has been that the majority of Charter’s value comes from its valuable broadband service. While video revenues have been flat, broadband grew at about a 10% pace in 2020. That latter pace is likely not sustainable, but with higher profit margins to begin with, we believe the broadband segment’s importance to Charter should only increase with time.

In December, Liberty Broadband completed its acquisition of GCI Liberty, a sister company that owns 2% of Charter stock, an Alaskan cable company, and a few miscellaneous assets. Liberty Broadband now owns about 25% of Charter shares. The significance of this acquisition is that it brings the owned Charter shares under one roof and simplifies Liberty Broadband’s corporate structure. This was probably a necessary step before an inevitable consolidation of Liberty Broadband with Charter itself. The timing of such a consolidation is unclear, and is probably one or two years out at a minimum, but such a deal should erase the discount to net asset value that Liberty Broadband stock trades for (currently about 20%). We think that Charter’s stock itself is undervalued by the market, so in effect, by owning Liberty Broadband, we own Charter at a double discount.”

Our calculations show that Liberty Broadband Corporation (NASDAQ: LBRDA) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, Liberty Broadband Corporation was in 26 hedge fund portfolios, compared to 25 funds in the third quarter. LBRDA delivered a -6.76% return in the past 3 months.