High Conviction: A 'Stunningly Cheap' Telecom Stock

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Fintech Value

Cale Smith is the portfolio manager of the Tarpon Folio, a spoke fund. He is also the founder and managing partner of Islamorada Investment Management, an independent value investing firm based in the Florida Keys.

We recently had the opportunity to ask Smith about his single highest conviction holding.

What is the highest conviction stock position in your fund?

Our highest conviction position is Neutral Tandem (TNDM). While we own some great businesses, few have earnings power as underappreciated as TNDM right now. It’s the dominant player in a previously obscure telecommunications niche, and it's stunningly cheap. I am unequivocally bullish and believe the laws of economics are squarely on the long side. More importantly, though, is that at current price levels, even if I'm wrong our losses should be disproportionately small.

I have tried repeatedly to kill this business on paper. Very few scenarios, however, are of the magnitude or urgency that would rationally explain the gap between this business's real value and what the market currently believes it's worth. I think the company is worth at least twice where it now trades.

The vast majority of shares appear to be held by growth funds, and selling that began last fall apparently attracted the attention of momentum shorts. The price decline originally began when fears arose about the impact of a T-Mobile and Sprint (S) merger on Neutral Tandem’s revenues, as both are big customers. Such a merger was improbable for several reasons, but the slide in shares has nonetheless continued relatively unabated.

There simply aren’t too many companies in the world with strong earnings power, high returns on invested capital, no debt, solid management, improving margins and a simple business that is hard for competitors to replicate. To be able to buy in when trading near multi-year lows is even more rare. Neutral Tandem

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