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Here is What Hedge Funds Think About Commscope Holding Company Inc (NASDAQ:COMM)

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Commscope Holding Company Inc (NASDAQ:COMM) has seen a jump in number of bullish hedge fund positions during the first quarter. There were 35 hedge funds with bullish positions in COMM at the end of first quarter vs. only 27 hedge funds with bullish positions at the end of 2014. In this article we will share Corsair Capital’s views on Commscope Holding Company Inc (NASDAQ:COMM). But first, let us explain why we even care about what hedge funds think about these stocks.

Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that hedge funds’ long positions actually outperformed the market. For instance the 15 most popular small-cap stocks among funds beat the S&P 500 Index by more than 80 percentage points since the end of August 2012. These stocks returned a cumulative of 135% vs. 55% gain for the S&P 500 Index (read the details). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).

Corsair Capital talked about its COMM position in its 2015 Q1 investor letter. We like Corsair Capital because Corsair Select fund delivered a net return of 13.6% annually since its inception at the beginning of 2004. S&P 500 Index returned only 7.9% during the same period. Corsair Select also returned 6.1% during the first quarter, outperforming the S&P 500 by more than 5 percentage points. Here is what they said:

Jay Petschek And Steven Major
Jay Petschek And Steven Major
Corsair Capital Management

“CommScope (“COMM”) rose 25% in the quarter. The outperformance was driven by the announcement in January that the company will merge with competitor TE Connectivity’s (“TEL”) Telecom, Enterprise and Wireless businesses by year-end 2015. This transformational combination will diversify COMM’s revenue from both a geographical and a cyclical perspective, provide significant synergy opportunities, and should be more than 20% accretive to COMM’s adjusted earnings per share in year 1 alone. We believe that pro forma free cash flow could ramp to $4.00 per share in 2017 and that the company could rapidly de-lever its balance sheet to 2.5x Net Debt/EBITDA by 2017 (from 4.5x today). Our view is that the stock will experience a re-rating of its multiple when the merger closes and as it executes its plan of capturing synergies and paying down debt. Valuing COMM at 12x 2016 EBITDA less CapEx (the peer average), we get a valuation of $50 per share. COMM stock ended the quarter at $28.54.”

To be perfectly clear, these views diverge from what sell side analysts think about COMM. Here is what Credit Suisse analysts Kulbinder Garcha, William Chu, and Sami Badri said about Commscope after the company’s earnings release:

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