Billionaire Says High Beta Stocks Are The Cheapest In The Market

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Southeastern Asset Management is extremely bullish on Level 3 Communications Inc. (NYSE:LVLT), as it ranked as the fund’s top stock pick at the end of June, and by a wide margin. Southeastern held 28.39 million Level 3 shares valued at $1.46 billion, while its Wynn Resorts Limited (NASDAQ:WYNN) position, its second-most valuable, was worth $1.05 billion.

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Longleaf points out that Level 3 Communications Inc. (NYSE:LVLT) is another case of a stock being overlooked in comparison to rivals like AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ), as it does not pay out a dividend, preferring to reinvest its cash into expanding its high-margin segments, while AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) both pay out dividends that yield about 5% annually. Level 3’s beta is also high at about 1.5, while AT&T and Verizon sport betas beneath 0.6.

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Thus, despite Level 3 Communications Inc. (NYSE:LVLT) having expected free cash flow growth in the teens compared to AT&T and Verizon’s mid-single digit marks, it currently trades at just 8-times EBITDA, while the latter two are trading for 7-times EBITDA.

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Level 3 Communications hit a 52-week high just before its second quarter financial results, but it’s shed over 17% of its value since then after missing revenue expectations with those earnings results. In mid-September, it was reported that Akamai Technologies, Inc. (NASDAQ:AKAM) was beginning to undercut Level 3 and Verizon’s CDN prices by as much as 15% as it tries to fill excess capacity in the wake of its two largest customers turning to in-house CDN solutions.

In terms of the smart money tracked by Insider Monkey, 55 hedge funds owned shares of AT&T Inc. (NYSE:T) at the end of June, while 52 were long Verizon, down from 61 a quarter earlier. Those hedge funds owned less than 1.5% of each company’s shares. In contrast, 48 hedge funds owned over 17% of Level 3’s shares.

Disclosure: None

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