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Is Liberty Latin America Ltd. (LILA) Going to Burn These Hedge Funds?

“Market conditions are changing. The continued rise in interest rates suggests we are in the early stages of a bond bear market, which could intensify as central banks withdraw liquidity. The receding tide of liquidity will start to reveal more rocks beyond what has been exposed in emerging markets so far, and the value of a value discipline will be in avoiding the biggest capital-destroying rocks. If a rock emerges on the crowded shore of U.S. momentum, it could result in a major liquidity challenge, as momentum is often most intense on the downside as a crowded trade reverses. So investors are facing a large potential trade-off right now: continue to bet on the current dominance of momentum and the S&P 500, or bet on change and take an active value bet in names with attractive value and optionality, but with negative momentum,” said Clearbridge Investments in its market commentary. We aren’t sure whether long-term interest rates will top 5% and value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. This article will lay out and discuss the hedge fund and institutional investor sentiment towards Liberty Latin America Ltd. (NASDAQ:LILA).

Is Liberty Latin America Ltd. (NASDAQ:LILA) undervalued? Investors who are in the know are in a bearish mood. The number of long hedge fund bets decreased by 3 in recent months. Our calculations also showed that LILA isn’t among the 30 most popular stocks among hedge funds. LILA was in 11 hedge funds’ portfolios at the end of the third quarter of 2018. There were 14 hedge funds in our database with LILA positions at the end of the previous quarter.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the market by 18 percentage points since May 2014 through December 3, 2018 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.

Warren Buffett and Billionaires

We’re going to take a look at the latest hedge fund action surrounding Liberty Latin America Ltd. (NASDAQ:LILA).

Hedge fund activity in Liberty Latin America Ltd. (NASDAQ:LILA)

Heading into the fourth quarter of 2018, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -21% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards LILA over the last 13 quarters. With hedge funds’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

LILA_dec2018

The largest stake in Liberty Latin America Ltd. (NASDAQ:LILA) was held by Berkshire Hathaway, which reported holding $56.6 million worth of stock at the end of September. It was followed by Ashe Capital with a $32.3 million position. Other investors bullish on the company included Two Creeks Capital Management, Bill & Melinda Gates Foundation Trust, and Cove Street Capital.

Seeing as Liberty Latin America Ltd. (NASDAQ:LILA) has experienced bearish sentiment from the aggregate hedge fund industry, it’s safe to say that there lies a certain “tier” of fund managers that elected to cut their positions entirely by the end of the third quarter. It’s worth mentioning that D. E. Shaw’s D E Shaw dropped the biggest investment of the “upper crust” of funds followed by Insider Monkey, comprising close to $0.5 million in stock. Frederick DiSanto’s fund, Ancora Advisors, also said goodbye to its stock, about $0.4 million worth. These moves are important to note, as aggregate hedge fund interest fell by 3 funds by the end of the third quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Liberty Latin America Ltd. (NASDAQ:LILA) but similarly valued. These stocks are Navient Corp (NASDAQ:NAVI), The Brink’s Company (NYSE:BCO), UMB Financial Corporation (NASDAQ:UMBF), and LiLAC Group (NASDAQ:LILAK). All of these stocks’ market caps match LILA’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NAVI 27 582199 -1
BCO 24 536565 5
UMBF 11 54261 -1
LILAK 19 394253 0
Average 20.25 391820 0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.25 hedge funds with bullish positions and the average amount invested in these stocks was $392 million. That figure was $121 million in LILA’s case. Navient Corp (NASDAQ:NAVI) is the most popular stock in this table. On the other hand UMB Financial Corporation (NASDAQ:UMBF) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Liberty Latin America Ltd. (NASDAQ:LILA) is even less popular than UMBF. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.

Disclosure: None. This article was originally published at Insider Monkey.

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