Silver Ring Value Partners recently released its Q3 2020 Investor Letter, a copy of which you can download here. The fund posted a return of 6.9% for the last 12 months (net), underperforming its benchmark, the Russell 3000 Index which returned 15% in the same period. You should check out Silver Ring Value Partners' top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.
In the said letter, Silver Ring Value Partners highlighted a few stocks and Liberty Latin America Ltd. (NASDAQ:LILA) is one of them. Liberty Latin America Ltd. (NASDAQ:LILA) is a telecommunications company. Year-to-date, Liberty Latin America Ltd. (NASDAQ:LILA) stock lost 46.9% and on November 5th it had a closing price of $10.24. Here is what Silver Ring Value Partners said:
"Liberty Latin America (LILAK)
The company provides cable TV, broadband, telephone and wireless telephone services in Puerto Rico, Virgin Islands and a number of Latin American markets such as Chile, Costa Rica and Panama. The company also has valuable underwater data cables connecting some of these markets to the internet.
Prior to the COVID pandemic this was a moderately growing business that had predictable, utilitylike characteristics. The company’s strategy is to combine cable and wireless services under one roof via acquisition. The biggest acquisition that is currently in the process of closing is the purchase of AT&T’s wireless business in Puerto Rico. This was done at a very attractive price and is both a strategic fit with the company’s existing cable business there and is very accretive to free cash flow.
The markets where the company operates have been heavily impacted by COVID, and business is down. I believe that these are temporary issues given the inelastic nature of demand for the company’s services, but there is a real risk of a prolonged recession in the region. Furthermore the company is highly financially levered, the AT&T deal could fall through, and there is always the risk of a stray hurricane devastating one or more of the company’s markets.
The company decided to do a moderately sized rights offering to raise capital for future acquisitions. This created a special situation where there was tremendous artificial selling pressure on the stock over a short period of time, dragging the stock down almost 20% on top of an already depressed price. At the recent low the stock was below 40% of my conservative Base Case value and below my Worst Case. I view Business Quality as Above Average (2 out of 5), Management Quality as Above Average (2 out of 5) and Balance Sheet as Average (3 out of 5).
I decided to use options instead of purchasing the equity because my analysis suggested that the options were more mispriced. You can refer to my Q2 2020 letter where I explain the rationale for occasionally buying “extreme call options” – options that are out of the money, but with a strike price still well below my Base Case value estimate. These situations are infrequent, but when they occur they set up very attractive risk/reward ratios of 10x-20x. Clearly there are many reasons why this might not work out, but given that the risk-reward ratio of the options to my Base Case value was 15x+, this investment had a very attractive expected value. In the short-term, absence of devastating hurricanes and the AT&T deal closing could serve as the catalysts for the price/value gap to close. Sizing the options position at 3% provided for an acceptable level of loss while allowing us to benefit substantially if the price to value gap closes."
In Q1 2020, the number of bullish hedge fund positions on Liberty Latin America Ltd. (NASDAQ:LILA) stock increased by about 9% from the previous quarter (see the chart here), so a number of other hedge fund managers believe in LILA's growth potential. Our calculations showed that Liberty Latin America Ltd. (NASDAQ:LILA) isn't ranked among the 30 most popular stocks among hedge funds.
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Video: Top 5 Stocks Among Hedge Funds
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Disclosure: None. This article is originally published at Insider Monkey.