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Is Millicom (TIGO) A Smart Long-Term Buy?

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Bonhoeffer Capital Management, an investment management firm, published its second-quarter 2021 investor letter – a copy of which can be downloaded here. A net return of 11.1% was recorded by the fund for the Q2 of 2021, compared to 5.9% and 4.5% returns of the MSCI World ex-US and the DFA International Small Cap Value Fund, respectively for the same period. You can take a look at the fund’s top 5 holdings to have an idea about their top bets for 2021.

In the Q2 2021 investor letter of Bonhoeffer Capital Management, the fund mentioned Millicom International Cellular S.A. (NASDAQ: TIGO) and discussed its stance on the firm. Millicom International Cellular S.A. is a Luxembourg, Luxembourg-based telecommunications company with a $3.8 billion market capitalization. TIGO delivered a -2.50% return since the beginning of the year, while its 12-month returns are up by 27.95%. The stock closed at $37.73 per share on August 27, 2021.

Here is what Bonhoeffer Capital Management has to say about Millicom International Cellular S.A. in its Q2 2021 investor letter:

"The increasing use of transaction processing in our firms’ markets and the rollout of 5G will provide growth opportunities. Given that most of these firms are holding companies and have multiple components of value (including real estate), the timeline for realization may be longer than for other firms.

Millicom, a new telecom firm added to the portfolio this quarter, is a combination of a Verizon wireless and a Charter Communications (a leading US cable company), operating in fast-growing Latin American countries. The rollout of fiber networks (a core communications service) is a future toll road being constructed worldwide. This region has been devastated by COVID, so short-term results will be challenging. Despite this, Millicom has continued to roll out a fiber-optic network in markets in Latin America as the only competitor—or one of two competitors—in each market. This will lead to high penetration rates; 30%+ in most of Millicom’s fiber optic network. This should result in 9% to 10% FCF growth rates over the next five to 10 years and today trades at a current valuation of 5x FCF and 3.6x five-year forward FCF. Given the location of this network (Latin America), it should trade at a discount to US networks; but, in my opinion, 5x FCF is extreme for a growing network with a lot of recurring revenue."

Photo by Mika Baumeister on Unsplash

Based on our calculations, Millicom International Cellular S.A. (NASDAQ: TIGO) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. TIGO was in 7 hedge fund portfolios at the end of the first half of 2021, compared to 5 funds in the previous quarter. Millicom International Cellular S.A. (NASDAQ: TIGO) delivered a -15.41% return in the past 3 months.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage.

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