Discovery Likes These Stocks

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Discovery Capital Management is one of my favorite Hedge Funds. As most funds, Discovery is a one man show but this man, Robert Citrone, is a witty investor and, throughout the years, he has shown wonderful results. Citrone, who worked along Julian Robertson in Tiger Management, runs the Global Opportunity Fund. It’s always a good idea for any investor to look at what this fund is selling or buying. This time, two Discovery holdings have kept my attention. They are Broadcom (NASDAQ: BRCM) and Sprint (NYSE: S). Let´s take a look at them.

BRCM is a provider of semiconductor for wired and wireless communications. Its products enable the delivery of voice, video, data and multimedia to and throughout the home, the office and the mobile environment. The company is one of the few companies in its segment that has driven dominant share in multiple end markets and product categories. BCRM is focused on delivering financial results for its shareholders. In a recent formal presentation, the CFO provided insights on BRCM’s view of financial success. According to him, financial success is driven by (1) enhancing value through M&A, (2) creating advantages as a result of outgrowing peers, and (3) managing the company’s economics and focus on delivering returns to shareholders. Those are not only just kind words, BCRM has been behaving that way for many years now. The company offers tremendous opportunities through strong wireless growth from smart-phone leaders (such as Apple and Samsung) at a reasonable price. Broadcom trades at 2013 10x P/E and 8.5x P/OCF, a 34% discount to its 5 year average. Besides, its FCF Yield of 11.2% compares favorably to its peer group (which has an average FCF yield of 7.2%). In this case, I have to agree with Mr. Citrone. BCRM seems like a clear opportunity for anyone looking for growth and value.

Sprint, the wireless and wire-line company, has been on my watch list for a while. The company has been making smart acquisitions and it’s clearly in recovery mode. That said, business success depends more on the boat you row than on the sailors rowing in it. In this case, the boat would be the telecom industry. The good news is that this industry is finally getting better thanks to better pricing and lower subsidies. Given its high leverage level, S stands to benefit more from positive industry trends than larger carriers. As a matter of fact, Sprint reported 3Q results that were a bit better than expected. The company reported subscriber net adds - although below consensus - and revenue, EBITDA, and wireless margins that were above market consensus. Trading at 2013 5x EV/EBITDA and 4.5x P/OCF (although still producing net losses) S seems like a good recovery story in a market that after many years is getting more profitable. I cannot deny Mr. Citrone has a point here. I would also go long on S.

Every time I see Discovery's portfolio I just like it. This is not an exception. Citrone was one of the first investors to describe Apple (NASDAQ: AAPL) as the cash flow machine that it actually is (AAPL still is one of Discovery´s main investments). He was not wrong on AAPL when he decided it was cheap a few years ago. I think he will be right this time too. Both Broadcom and Sprint seem inexpensive and in a position to benefit from market trends. I would consider them for any portfolio looking for growth and a good recovery story. 

martinzaldua has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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!

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