Market Doesn’t Appreciate How Cyclical Apple (AAPL) Is: Nishkama Capital Talks about Its Investments

Nishkama Capital is an investment fund founded by Ravee Mehta who previously worked as a Managing Director at Karsch Capital Management LLC. Before that, he worked as an analyst at the George Soros owned Quantum Fund. Ravee Mehta has also written a book on investing – “The Emotionally Intelligent Investor”. Nishkama Capital has given a return of 3% during the third quarter of 2016 and a cumulative return of 9% during the first three quarters of this year. The fund uses a differentiated framework that is often the source of its analytical edge. Ravee thinks that many of his biggest winners have come from looking at a stock very differently than the market. In a letter to investors, Ravee Mehta talked about some of the fund’s holdings.

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Apple Inc. (NASDAQ:AAPL) is the world’s most valuable technology company with a market value of almost $550 billion. It is also the biggest position of the fund accounting for 9.25% of its total holdings at the end of the third quarter. Ravee Mehta thinks the market under-appreciates how cyclical the company really is. Apple Inc. (NASDAQ:AAPL) has a highly loyal customer base that is on a somewhat predictable replacement cycle. The installed base of iPhone users is still growing at a double digit rate. Apple Inc. (NASDAQ:AAPL) has been caught off guard by the strong demand for the higher-priced iPhone 7+ and may not even have supply to catch up to demand for this model by the end of the year. Warren Buffett’s Berkshire Hathaway is another shareholder of Apple, with ownership of 15.23 million shares as of the end of September.

Evertec Inc (NYSE:EVTC) is the leading payment processor and business process management services company in Puerto Rico. The company represents the second-largest holding of Nishkama Capital amassing about 9% of the fund’s portfolio. According to Ravee Mehta, the market is not focusing on the long-term secular growth and value creation options available to the company. He thinks that the stock is undervalued owing to concerns with the Puerto Rico’s economy and the prior management’s mis-execution. However, Nishkama Capital seems positive about Evertec Inc’s (NYSE:EVTC) accretive acquisitions in Latin America and its new management. The company could be a huge beneficiary of growth in electronic payments, since majority of transactions in Puerto Rico are in cash. Ravee Mehta also stated that Evertec Inc (NYSE:EVTC) is a good acquisition candidate and points out that the company did quite well during the last quarter, despite weakness in the local economy. A total of 16 funds that we track held shares of Evertec Inc (NYSE:EVTC) worth $226 million in aggregate at the end of June.

Nishkama’s stake in Control4 Corp (NASDAQ:CTRL) amasses around 3.5% of its equity. The market, according to Ravee Mehta, is paying more attention to its long-term concerns rather than focusing on the company’s near-term upside. The stock is up by more than 53% year-to-date and trades at a relatively cheap valuation of 11 times the consensus 2017 EPS estimate (which is too low according to the investor). There is a huge addressable market in the form of 14 million US households, out of which only 2% has been penetrated. According to Ravee Mehta, Control4 Corp (NASDAQ:CTRL) could be the “clear leader in the high-end of the market”. Moreover, the revenue synergies from its recent acquisition of Pakedge are still to be realised. The market still has to factor in these benefits creating a potential upside to the consensus estimates, the fund added. Among the funds in our database, the number of funds holding shares of Control4 Corp (NASDAQ:CTRL) increased to 10 from seven during the second quarter.

Sinclair Broadcast Group Inc (NASDAQ:SBGI), which is a leading TV broadcaster in the US, has been one of the fund’s top losers so far in 2016 and it decided to dump the stock. The fund thought that Sinclair’s stock would benefit from the ownership of the intellectual property around ATSC 3.0, which would enable consumers to receive over-the-air broadcast TV on their phones without paying for data. However, Ravee Mehta admitted that they went wrong in timing the catalyst and now they are less confident about the company beating its 2017 consensus estimates. They are also not sure if and when SBGI’s intellectual property for ATSC 3.0 will be monetized and whether it will even generate anything for the company. The number of funds followed by us long Sinclair Broadcasting Group  declined by nine to 33 during the second quarter.

Disclosure: None