3 Top Opportunities From Fir Tree Partners
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In this article I analyze Fir Tree Partners portfolio. Fir Tree Partners is a New York City based privately owned investment hedge fund founded by Jeffrey Tannenbaum in 1994. The fund has been averaging a healthy return of 28% annually since its inception, beating the S&P 500 index by over 18%. Today, the firm manages over seven billion dollars on behalf of major endowments, foundations, pension funds (private and public) and other institutional and individual investors. One of the questions Fir Tree asks about a possible investment is “Why is it mispriced?” Jeff Tannenbaum (Fir Tree’s founder) explains that if you don’t have a strong reason, there’s a good chance that it isn’t mispriced. (Source: Hedge Fund Letters.com).
I mentioned many times in my blog the importance to study what top hedge fund holds in their portfolios. Let’s review Fir Tree's current holdings:
Motorola Solutions: a leading technology provider
Fir Tree’s top holding is Motorola Solutions (NYSE: MSI). The company is a leading communications equipment manufacturer, and has strong market positions in bar code scanning, wireless infrastructure gear, and government communications. There are several positives about this company:
First, Motorola Solutions is the leading developer of public safety products (50% of US market share) and the largest manufacturer of barcode readers and mobile computers. The company only sells to stable governments/enterprises (70% of company´s revenues) and has a huge order backlog that grew 11% year/year. The company reported strong revenue and earnings growth in the last 3Q report and presented a solid outlook for the fourth quarter for both top and bottom line growth.
Second, Motorola could benefit from the proposed installation of 4G LTE networks for public safety. The government distinguished a 10 MHz block of spectrum, which is known as the D block in the 700 MHz frequency band, solely for installing a nationwide super-fast public safety network. The establishment of a national communication-network for first responders was one of the final outstanding recommendations from the 9/11 commission to help increase national security. It is anticipated that the FirstNet broadband network will be built with standards-based 4G/LTE broadband technology, allowing for much faster data transmissions than legacy networks. It will enable a new host of next generation applications for public safety; such as high-definition streaming video, building plans, and blueprint transmissions and much more according to a white paper issued by Motorola.
Third, MSI has a shareholder oriented management team. The board increased its ongoing share repurchase program by another $2 billion and raised the company’s quarterly dividend by 18%. It is essential to invest in companies that both increase dividends and buy back shares.
Lastly, the stock is not expensive. Motorola is trading at a forward P/E of 17x which is a discount to the Industry’s average earnings multiple of 22x. Motorola Solutions enjoys market leadership in the lucrative public safety market in the U.S. and is a major player in the barcode scanning industry which is expected to grow in the coming years.
Equinix: Another IT leader
Fir Tree’s second holding is Equinix (NASDAQ: EQIX), a position that the fund increased by 6% last quarter. The company is a leading player in the co-location, interconnection, and managed IT services market. As internet usage rises, the need for an organized approach to network interconnection for accommodating the higher traffic volume also increases. That is Equinix main strength. I believe that the data center business model continues to be attractive to investors looking for exposure to growth in Internet, especially in an uncertain macro environment.
I think that the most important catalyst for Equinix comes from its recent REIT conversion announcement. Equinix is planning to convert to a REIT in 2015 and the stock’s valuation is not yet considering that change. Why I think this way? These kinds of structures are valued using the Adjusted Funds From Operations (AFFO), a proxy for operating cash flow less maintenance and capital expenditures. Considering that Equinix guided at least $3 billion in revenues or at least $20 a share in AFFO for 2015, the stock could trade at $320 in less than 3 years if you check that other datacenter REITs trade at multiples between 16-20x AFFO. For example, Digital Realty trades at 16x 2013 AFFO and American Tower trades at 20x AFFO.
There are other positives in the Equinix story like its leadership position, strong customer base, increased internet usage, etc. But the REIT conversion theme is one of the strongest reasons to believe in this stock.
Scandal = Opportunity ?
The fund initiated a position in the last reported quarter in Global Payments (NYSE: GPN) at an average price of $43. The most interesting fact about GPN is that the stock was about to break all-time highs of $55 in April, but a sudden scandal created a 25% selloff in just 2 months. What happened ?
Global Payments announced that it identified unauthorized access to some of its processing systems. Sometime in early March, credit card data may have been accessed with some 50,000 cardholders possibly at risk. That selloff created an opportunity in the stock because it trades at a P/E of 12.5x, a P/S of 1.7x and a P/B of just 2.8x compared to the industry average P/E of 3.5, P/S of 3x and P/BV of 2.8x. This is a very reasonable valuation for a company showing double-digit revenue growth over the last years in combination with some healthy net margins.
It is important to remember that scandals provide investors with enormous opportunity as shares go on sale related to specific events. In 1950, Warren Buffett invested in AmEx because the stock went down 50% due to the Salad Oil scandal. The company survived and Warren made a lot of money from that opportunity. Could that be repeated with Global Payments and what is now trading at $45 could go to $54 in the next 12 months? I want to hear your thoughts!
martinzaldua has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!