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Does Investing in Discovery Inc. (DISCA), Still a Good Investment Choice?

·5 min read

White Brook Capital, an investment management firm, published its first quarter 2021 investor letter – a copy of which can be downloaded here. A return of 25.42% was delivered by the fund for the Q1 of 2021, ahead of its S&P 500 and S&P Midcap 400 benchmarks that delivered a 6.2% and 13.47% returns respectively for the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.

White Brook Capital, in their Q1 2021 investor letter, mentioned Discovery, Inc. (NASDAQ: DISCA), and shared their insights on the company. Discovery, Inc. is a New York-based mass media company that currently has a $16.3 billion market capitalization. Since the beginning of the year, DISCA delivered a 20.42% return, extending its 12-month gains to 46.52%. As of April 27, 2021, the stock closed at $39.01 per share.

Here is what White Brook Capital has to say about Discovery, Inc. in their Q1 2021 investor letter:

"Discovery Communications voting shares (DISCA) were sold in favor of swapping the stake with Discovery Communications non-voting C shares (DISCK). Discovery has three classes of stock with varying voting power but that share equally in the economics of the business. We initially owned the class A voting shares, that have a single vote per share because they traded within the range of its historical premium to the C shares, and it’s usually inconsequential which one owns. This is because Discovery’s board of directors is populated with members loyal to Dr. John Malone, the largest individual shareholder - therefore a shareholder’s vote which typically advises the board is relatively meaningless.

During the quarter, the premium the A shares traded for expanded significantly from the historical ~5% to almost 20%. This caused White Brook to swap our investment from the A shares to the C shares. We then continued to sell the stock as it increased in value, continuing to have a significant, but not full stake as the stock doubled during the quarter. While a 30-50% rise in the stock price from where it closed last year seemed reasonable for the year, in excess of 50% was excessive and the ~130% rise at its peak was irrational. After selling much of the position for a very healthy gain, I held on to a stake until peer ViacomCBS took advantage of its own even more impressive rise by issuing equity to cure it’s over indebted balance sheet. Believing the bubble to finally be deflating, I sold our remaining position. Several days later, Discovery fell precipitously as an over-levered Fund that had recklessly bought Discovery, ViacomCBS and several other stocks fueling their rise, “blew up”. At quarter end the stock was up ~35% year to date (although it has appreciated considerably in the early days of this quarter).

Exchanging Discovery’s A shares for C shares was the right move, despite the harmful tax consequences. Had we held the A shares for the exact same length of time, we would have made more money as 1) the spread between the A and C shares widened during our time owning the C shares and 2) the taxes of selling just our A shares would have been less significant than the long term capital gains we will endure on the A shares and the short term gain we recognized on the C shares. But by exchanging A shares for C shares, we owned the same company at a much cheaper price and it meant I could rationalize the price of the Company, longer. If it happened again, I would likely make the same exact trades. The process was correct, even if the outcome wasn’t ideal. I continue to like Discovery’s prospects, and we may re-enter the stock in the future if its valuation is again unreasonably cheap. It was a very good investment for the Firm even without the extraordinary run. The extraordinary additional returns added almost 1000 bps to gross performance (~35%) for the quarter or just less than a third of our gross outperformance vs the S&P 500."

Our calculations show that Discovery, Inc. (NASDAQ: DISCA) 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, Discovery, Inc. was in 28 hedge fund portfolios, compared to 29 funds in the third quarter. DISCA delivered a -17.10% return in the past 3 months.

The top 10 stocks among hedge funds returned 231.2% between 2015 and 2020, and outperformed the S&P 500 Index ETFs by more than 126 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Here you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

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Disclosure: None. This article is originally published at Insider Monkey.