Paul Singer Is Betting on This Small Stock, You Should Too

Investing is extremely difficult if you are focusing on large-cap companies and their short-term performance. Even the smartest hedge fund managers can’t produce any meaningful alpha after taking into account their management and performance fees. On the other hand, investing is easy if you are focusing on small-cap companies and their long-term performance. In this article we will share an idea that is likely to beat the market by a large margin over the next couple of years.

Mitel

Mitel Networks Corporation (NASDAQ:MITL) has been a popular stock among hedge fund managers, with Jim Simons of Renaissance Technologies, Paul Singer of Elliot Management and Joseph A. Jolson of Harvest Capital Strategies holding a more than 1% stake in the Canadian communications company. Constantinos Christofilis, Peter Muller, and Josh Goldberg are also among hedge fund managers with positions in the stock at the end of the fourth quarter of 2013. We pay attention to what hedge funds are doing because our research has shown that the most popular stocks among hedge funds tend to outperform the market by a large margin on average (read the details here).

Mitel Networks Corporation (NASDAQ:MITL) is a $900 million market cap company that provides communication and collaboration software and services primarily to small-to-medium sized businesses (SMBs). Historically, it has been a profitable company with strong growth, high free cash flow generation and a track record of beating consensus estimates.

Mitel Networks Corporation (NASDAQ:MITL) recently completed its $370M acquisition of Canadian rival Aastra Technologies (TSX:AAH), expanding its market position in Canada (where MITL was already the leader before the deal) and Europe while providing a better platform for growth in the U.S. It also increases Mitel Networks Corporation (NASDAQ:MITL)’s global end user base to over 60M, expands its client base to larger enterprises, and combines two sales forces with minimal overlap. Financially, the transaction provides scale benefits (with combined revenue exceeding $1.0 billion), $50 million in low-risk run-rate synergies by 2016 (the vast majority of which will be realized by 2015), reduced net leverage and a strong cash flow profile. Given the extensive experience both companies’ management teams have in integrating acquisitions and realizing cost savings (four transactions were successfully completed by each company over the past several years), the synergy guidance could be conservative, in our view. It is worth noting that the present value of the $50 million in synergies on an after-tax basis is approximately $400M, which is roughly in-line with the combined increase in market values of the two companies since the deal was first announced on November 11, 2013. This implies investors believe management’s goals are achievable, while any further synergies, either on the revenue or cost side, would provide further upside for the stock.

Mitel Networks Corporation (NASDAQ:MITL)’s valuation looks reasonable, trading at an EV/EBITDA multiple of 9.2X, in-line with its peer group of communications equipment companies. Synergies related to the deal should aid Mitel Networks Corporation (NASDAQ:MITL)’s earnings over the next two to three years, which are admittedly not within the investment horizon of many shareholders, but any progress in realizing them should aid investor sentiment and, eventually, the multiple assigned to its earnings stream. Given the large size of the deal, successfully realizing synergies from the combined company will be the key driver of future stock performance. With strong track records of both management teams in integrating past acquisitions, we believe execution risk related to the Aastra deal is fairly low and shareholders will be rewarded over the long-term.

Disclosure: none

Recommended Reading:

Kurt Billick’s Bocage Capital Is Betting On These Stocks

Free Stock Research Report: Polycom Inc (PLCM)

Free Stock Research Report: Outerwall Inc (OUTR)

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 9 Most Dangerous Countries for Tourists to Visit

Reign of Terror: The 10 Most Ruthless Politicians in History

On the Move: The 10 Fastest Growing Businesses in 2015

Fast Money: The 10 Highest Paying Fast Food Restaurants

Mixing It Up: The 14 Best Music Mashups of 2014

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!