Value investor Brandes Investment Partners LLC has made a bold bet on the telecommunications industry, putting almost one-fifth of its money in the struggling sector.
"This has all the markings of a classic burst bubble and, in our minds, some of these telecom names are very, very worth owning at these prices," said Chris Richey, director of mutual fund portfolio management at San Diego-based Brandes.
The company -- which manages about $60-billion (U.S.) and, in early July, launched nine mutual funds available to Canadians -- has stakes in a variety of phone companies around the world. Mr. Richey said his firm has focused mostly on incumbent firms with dominant market share and a long history of solid cash flow and profits, as well as the equipment makers that supply those companies.
According to a recent filing with the U.S. Securities and Exchange Commission, Brandes had major positions of more than $400-million in half a dozen companies as of June 30, including phone companies Telefonos de Mexico SA and Spain's Telefonica SA, and equipment maker Nortel Networks Corp., based in Brampton, Ont.
Brandes's Nortel position -- $433-million worth of common shares -- was purchased in June when the cash-strapped Canadian firm raised net proceeds of almost $1.5-billion through an offering of shares and "equity units," which effectively are convertible debentures.
Mr. Richey said Brandes saw "compelling value" in Nortel's offering. "It's a difficult company to value in a lot of ways because they are in the midst of a major restructuring," he said. "No one should take their situation lightly. But when we look at that company -- its position, its international strength, the quality of its equipment -- we believe it's a good stock at the valuation we picked it up at."
Nortel offered shares in June at $1.41 each and the stock closed at $1.23 in New York yesterday.
Brandes, like many value investors, takes longer-term positions, hunting for out-of-favour companies and holding them for three to five years as "intrinsic" value is slowly recognized by capricious markets. Though the money manager does make basic valuation decisions based on financial results, Mr. Richey said it often makes its own judgments, trying to gauge what a firm such as Nortel could be worth in more "normal" industry conditions.
"We've always been accounting skeptics," he said. "We've had to be because we started off [as a firm] internationally. We've never taken nominal earnings or cash flow or book [value] and simply swallowed those whole. We've always torn them apart and said, for instance, 'That accounting practice is nonsense.' "
The telecom industry boomed in the later 1990s after deregulation in the United States and the emergence of the Internet. But telecom, like the broader technology sector and, indeed, benchmark stock indexes, eventually bubbled to impossible heights before crashing back to Earth, a freefall that drove some stocks such as Nortel to two-decade lows.
But although the crash sent some investors fleeing, the wreckage has attracted other big-name value investors along with Brandes. For example, George Morgan of Franklin Templeton Investments Corp. and manager of Canada's largest mutual fund took a small stake in Nortel in June and has a position in SBC Communications Inc. of San Antonio, Tex., as does Brandes.
Mr. Richey said investors who were burned in the telecom meltdown are now going too far in avoiding the sector.
"They're acting more like jilted lovers than investors."
© 2007 The Globe and Mail. All rights reserved.
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