When I last recommended Vodafone (LSE: VOD) (NASDAQ: VOD.US) on the Motley Fools US sister site five years ago, I suggested that the company was safe but not particularly sexy. As it happens, today that prediction looks quite accurate: the stock is trading about 50% higher than its 2009 valuation, after factoring in the 6:11 reverse share split this January. Thats nothing spectacular, but no disaster story either.
That said, if you had bought Vodafone when I sold it on February 22 this year just prior to the sale of its 45% stake inVerizon Wireless, you would have showed gains of 110% which represented nearly a threefold return on the FTSE 100overall.
There has been a lot of griping among shareholders of Vodafone this year, many of who have been caught off-guard by the sudden drop in the value of the shares in the second and third quarters.
Adding to uncertainty, Vodafone has been voraciously snapping up competitors in European markets. In March it paid 7.2 billion for Grupo Corporativo Ono, a Spanish cable provider. Then on Friday, it said that it would take a 72.7% stake in Hellas Online for 72.7 million.
Bondholders are fretting about the rising debt incurred. At the end of March this year, Vodafones debt was 28.3 billion, which is 1.83 times the companys forecast 2015 EBITDA. Moodys has suggested more leveraging could cause the company to lose its A3 credit rating.
The Worlds Biggest Telecommunications Fund
What everyone misses is that Vodafone is essentially a private-equityfund specialising in telco and data communication devices. It snaps up big holdings of complex and illiquid assets at small premiums, and uses its sprawling financial and technological infrastructure to add value to those holdings over long periods of time. Eventually, it spits those pieces out for a profit. When it does, a Verizon scenario is the rainbow thats at the end of the horizon.
This means that shareholders want Vodafone to leverage its assets and make acquisitions at a fast clip when its sitting on cash, especially when they are obtained around market value in an environment where prices are rising. So for long-term holders, we shouldnt really care about the bondholders concerns, nor the immediate dividend scenario (read my Foolish colleague Alan Oscrofts excellent analysis of the companys dividend scenario here). The big windfalls come in huge, one-time payments or smaller variants thereof. With an economic uptrend under way, theres a higher chance this sort of activity will pick up now.
In this case more than most, timing is everything however.
Thereisnt a lot further down to go, and when the stockrises it could do so sharply: recently, it was rumoured that Softbank or AT&Tmight swoop in and make a bid for the company at 300p per share. The rumours have been quietened by the announcement of the companys Hellos stake, but that was just a tiny deal so they may well come back soon, or even materialise.
Don’t Make The Mistake Of Accruing Classic Early “Bull Market Losses”
Making correct calls on market timing andinvesting according to the strengths of a company’s businessmodel are especially important considerationsin a bull market where valuations are more sensitive and subject to impact.
Vodafone is not alone in that its share price has fallen despite the overall strength of the market: this report by the Motley Fool gives you six other examples of such stocks (some which might make for interesting buying opportunities now they’ve come off a bit).
Download this report now (it’s free and there is no catch … this is the Motley Fool here, after all) to find out which stocks these are and how to identify them – this guide is very detailed and sheds a lot of light on the way in which this particular bull market is getting under way and it cautions what to look out for. At the very least, it is well worth the expense of filling in an email address and taking a glance at. If you don’t believe me, just ask anyone who’s been holding Vodafone for the past six months!
Daniel Mark Harrison has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.