With traders fixated this week on wild swings in meme stocks like Bed Bath & Beyond and mixed signals from Federal Reserve officials, it was easy to miss under piles of regulatory disclosures that hedge funds have been quietly buying T-Mobile US Inc.
The mobile phone carrier was the biggest position at Steven Cohen’s Point72 Asset Management at the end of the second quarter. In total, at least 25 hedge funds had 5% or more of their equity investments in the stock, according to a Bloomberg analysis of quarterly 13F filings. At Tekne Capital Management, the position was 18% of its book.
Anyone paying attention has watched T-Mobile steadily rise up the leaderboard of the Nasdaq 100 in a year in which technology and communications stalwarts have been pummeled amid soaring interest rates and slowing economic growth. The stock has gained 26%, far outpacing the performance of broad markets. The Nasdaq 100 is down 19% so far this year, while the S&P 500 is down 11%.
T-Mobile is benefiting from a banner year for mobile phone subscribers attracted by its cut-rate service plans at a time when high inflation is taking a bite out of consumers’ paychecks. After years of lagging behind peers like Verizon Communications Inc. in network quality, T-Mobile is also gaining from investments in spectrum and its 2020 acquisition of Sprint, according to analysts.
“T-Mobile has gained a 5G network advantage, and is no longer just a value leader but can compete and win on network quality as well,” said Ric Prentiss, an analyst at Raymond James.
Another T-Mobile feature that could be making the stock attractive to hedge fund managers: the company is in a good position to splurge on its own shares.
Unlike Verizon and AT&T, T-Mobile doesn’t pay a dividend, which gives the company more flexibility to allocate capital. At the same time, earnings are on the rise thanks to synergies from the Sprint combination and subscriber growth. Profit is projected to more than double next year to $6.44 per share, according to the average of analyst estimates compiled by Bloomberg.
“One of its great advantages is that it’s not burdened by the dividend and so it can return cash to shareholders in whatever is the most efficient way,” said Craig Moffett, analyst at research firm MoffettNathanson. “Most investors would say that the share repurchase program that is expected to start later this year will be a more efficient and more attractive path to cash return than a dividend would be.”
More than four-fifths of the analysts on Wall Street that cover the stock have a buy rating, according to data compiled by Bloomberg. By contrast, fewer than half of analysts recommend buying Verizon and AT&T. The average price target for T-Mobile implies a gain of about 19% from Friday’s closing price.
Hedge funds weren’t the only buyers of T-Mobile in the second quarter. Deutsche Telekom purchased $2.4 billion of shares from Softbank Group Corp., taking it closer to its goal of holding a majority of the company. The German telecommunications giant held 48% of T-Mobile’s outstanding shares, Deutsche Telekom said in April.
Of course, T-Mobile shares don’t come cheap. Priced at 30 times earnings projected over the next 12 months, it’s more than three times more expensive than AT&T and Verizon and could be vulnerable to a reversal if momentum shifts.
Though T-Mobile has seen “great” business growth this year, it’s still “extremely expensive,” said David Bahnsen, chief investment officer at the Bahnsen Group. It’s a “speculative play, more than it’s a stable value play.”
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