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In this article, via an analysis (based on the latest available institutional 13-F filings) of the investing activities of the world largest fund managers managing between $100 billion and over a trillion dollars, we identify the telecom equipment stocks that are being accumulated and those being distributed by these mega managers. We then crossed that data with the telecom equipment companies that are trading at value prices, based on their projected earnings for FY 2012 and the operating cash flow on a trailing-twelve-month (TTM) basis and other valuation measures such as price to operating cash flow (P/CF), price to book (P/B) and price to sales (PSR) ratios, and came up with a list of undervalued companies in the sector that are being accumulated by these mega fund managers, and those being distributed by them. The list includes prominent managers such as Wellington Management ($1.6 trillion in total assets under management), Vanguard Group ($1.4 trillion), Fidelity Investments ($640 billion), T Rowe Price ($330 billion), and Goldman Sachs Asset Management ($580 billion), among others.

We determined based on our analysis that mega fund managers are bearish on the telecom equipment group. During the June quarter, these mega fund managers together cut a net $640 million from their $104.79 billion prior quarter position in the group, selling $10.03 billion and buying $9.39 billion worth of stocks in the group. Furthermore, overall they are under-weight in the group by a factor of 0.9; that is taken together mega funds have invested 2.0% of their capital in the group companies compared to the 2.4% weighting of the sector in the overall market. Earlier, in our review last month on the investing activities of legendary or guru fund managers in the telecom equipment group, we determined that guru managers were also bearish on the group, and they were also under-weight in the group.

The following are the telecom equipment group companies that mega fund managers accumulated the most in the recently reported June quarter, and that are also trading at a discount to their peers in the group:

Polycom Inc. (NASDAQ:PLCM): PLCM develops communication products that enable unified video, voice and content collaboration for enterprise, government, education and healthcare customers. Mega funds added a net $139 million to their $1.76 billion prior quarter position, and taken together mega funds hold 56.1% of the outstanding shares, significantly higher than their 26.9% weighting in the sector. The top buyers were Fidelity Investments ($418 million) and Franklin Street Advisors ($27 million). Overall, 295 institutions hold company shares, with Fidelity Investments ($350 million), Delaware Management Business Trust ($322 million), Wellington Capital Management ($223 million) and Macquarie Group ($202 million) being the top holders with 10.7%, 9.8%, 6.8% and 6.2% of the outstanding shares respectively.

PLCM trades at a discount 14 forward P/E compared to the 22 average for its peers in the networking group, and it trades at a 15 P/CF ratio compared to the 19 average for the group.

Alcatel-Lucent ADS (NYSE:ALU): ALU, the telecommunications giant, is the result of a 2006 merger between France-based Alcatel and U.S.-based Lucent Technologies. It operates in over 130 countries worldwide and is a leading provider of telecommunications equipment and services to fixed line, wireless and Internet service providers. It is also the world leader in ADSL1 equipment. Mega funds added a net $308 million to their $650 million prior quarter position, and taken together mega funds hold 19.6% of the outstanding shares, significantly lower than their 26.9% weighting in the sector. This is understandable as ALU being Europe-based most likely has a significant number of Europe and Asia-based institutions holding company stock. The top buyer was Fidelity Investments ($350 million), who was also the top holder by far ($757 million). Overall, 325 institutions hold 20.3% of the outstanding shares, with Fidelity Investments and Artis Capital Management ($71 million) being the top holders with 8.6% and 1.5% of the outstanding shares, respectively.

ALU trades at a discount forward 6 P/E compared to the 11 average for its peers in the telecommunications equipment group, and it trades at a 1.1 P/B ratio that is also lower than the average 1.9 for the group.

Nokia Corp. Ads (NYSE:NOK): Finland-based NOK is a worldwide leader in mobile communications. It is a leading supplier of mobile devices, a leading supplier of mobile, fixed and IP networks, and a provider of Internet and digital mapping and navigation services worldwide. Mega funds added a net $270 million to their $844 million prior quarter position, and taken together mega funds hold 4.4% of the outstanding shares, significantly lower than their 26.9% weighting in the sector. This is understandable as NOK being Europe-based most likely has a significant number of Europe and Asia-based institutions holding company stock. The top buyers were Wellington Capital Management ($114 million), Dodge & Cox ($104 million) and Goldman Sachs Asset Management ($76 million). Overall, 422 institutions hold 9.8% of the outstanding shares, with Dodge & Cox ($446 million) and Tradewinds Global Investors ($419 million) being the top holders with 1.9% and 1.7% of the outstanding shares, respectively.

NOK trades at a discount 11 P/E on a trailing-twelve month (TTM) basis compared to the 19 average for its peers in the wireless equipment group, and it trades at a 1.4 P/B ratio and a 0.4 PSR ratio compared to the 1.6 averages on both measures for its peers in the group.

The following are telecom equipment companies that these mega fund managers are most bearish about (see table):

Cisco Systems Inc. (NASDAQ:CSCO): CSCO is the worldwide leader in the manufacturing of IP-based networking and other products related to the communications and IT industry worldwide. Its products include switches, routers and other networking and communications hardware for corporate, education and government networks around the world. Mega funds cut a net $1.04 billion from their $26.98 billion prior quarter position, and taken together mega funds hold 26.3% of the outstanding shares, approximately at par with their 26.9% weighting in the sector. The top sellers were Janus Capital Management ($862 million) and Capital World Investors ($464 million). Overall, 1,510 institutions hold 67.5% of CSCO shares, with Vanguard Group ($4.03 billion) and State Street Corp. ($3.92 billion) being the largest holders with 4.0% and 3.9% of the outstanding shares, respectively.

Juniper Networks Inc. (NYSE:JNPR): JNPR provides secure network infrastructure products and services that enable ISPs and telecommunications service providers to deploy services and applications and meet the demands resulting from the rapid growth of the Internet. They offer next-generation Internet backbone routers that offer service providers increased reliability, performance, scalability, interoperability and flexibility, and reduced complexity and cost compared to current alternatives. Mega funds cut a net $463 million from their $6.32 billion prior quarter position, and taken together mega funds hold 44.6% of the outstanding shares, significantly higher than their 26.9% weighting in the sector. The top sellers were Fidelity Investments ($155 million), Capital World Investors ($121 million) and Ameriprise Financial ($107 million). Overall, 523 institutions hold 86.2% of JNPR shares, with T Rowe Price ($1.22 billion) and Fidelity Investments ($711 million) being the largest holders with 9.8% and 5.7% of the outstanding shares, respectively.

Ericsson LM Telephone Co. (NASDAQ:ERIC): ERIC is a Swedish manufacturer of wireless and fixed-line telecommunications networks and handsets. It is a total solutions supplier for all customer segments: network operators and service providers, enterprises and consumers. Mega funds cut a net $74 million from their $700 million prior quarter position, and taken together mega funds hold 1.8% of the outstanding shares, significantly lower than their 26.9% weighting in the sector. This is understandable as ERIC being Europe-based most likely has a significant number of Europe and Asia-based institutions holding company stock. The top sellers were Dodge & Cox ($57 million) and Citigroup ($34 million). Overall, 220 institutions hold 7.6% of ERIC shares, with PRIMECAP Management ($548 million) and Dodge & Cox ($328 million) being the largest holders with 1.8% and 1.1% of the outstanding shares, respectively.

Akamai Technologies Inc. (NASDAQ:AKAM): AKAM is a global provider of services that help enterprises and e-businesses improve the delivery of their content and applications over the Internet. Its services include dynamic content and application delivery, application performance technologies, traffic management and online storage and load balancing. It offers content delivery network services and streaming media services in addition to private content delivery. Its solutions enable its customers to operate their web transactions anywhere, anytime with cost-effective outsourced infrastructure, and to carry out predictable, scalable and secure e-business at low costs. Mega funds cut a net $273 million from their $1.68 billion prior quarter position, and taken together mega funds hold 25.0% of the outstanding shares, significantly approximately at par with their 26.9% weighting in the sector. The top sellers were Janus Capital Management ($143 million) and Wellington Capital Management ($83 million). Overall, 484 institutions hold 74.5% of AKAM shares, with Vanguard Group ($286 million) and Morgan Stanley ($235 million) being the largest holders with 5.5% and 4.5% of the outstanding shares, respectively.

Table

Click to enlarge

General Methodology and Background Information: The latest available institutional 13-F filings of over 30-plus mega hedge fund and mutual fund managers were analyzed to determine their capital allocation among different industry groupings and to determine their favorite picks and pans in each group. These mega fund managers number less than 1% of all funds and yet they control almost half of the U.S. equity discretionary fund assets. The argument is that mega institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When mega Institutional Investors invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his/her own due diligence.

Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our "opinions" and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Undervalued Telecom Equipment Picks By The World's Largest Money Managers