The Big Money Says to Buy IDT

One of the great maxims of traders and Wall Street pros is to follow the "smart money."

I'm not much for the thesis that institutional shoppers tend to make smarter investing decisions, but many of you who've read my ruminations on insider buying say you'd also like to know how the Big Money is betting. Your wish is my command.

Next up: IDT (NYSE: IDT  ) . Are institutions bullish or bearish when it comes to this small telecom?

Foolish facts

Metric

IDT

CAPS stars (out of 5) **
Total ratings 101
Percent bulls 75.2%
Percent bears 24.8%
Bullish pitches 11 out of 14
Highest-rated peers Telkom SA, Shenandoah Telecommunications, Linktone

Data current as of Nov. 24.

IDT isn't an easy company to know. Most of its revenue comes from offering telecommunications-carrier services and prepaid calling cards, yet 14% of the business comes from reselling natural gas and electricity in the New York City area.

In years past, that business model has proved to be a potent combination. Motley Fool Hidden Gems co-advisor Andy Cross rated the stock to outperform in summer of the 2007, and it's nearly doubled since.

"They are the No. 1 provider of prepaid telephone cards," Andy wrote at the time. "This biz has stalled recently in a cutthroat environment, but if management can stabilize it, then it will be able to deploy the cash flow to more valuable businesses."

Today, IDT produces prodigious amounts of free cash flow -- more than $100 million over the past 12 months, in fact, assuming you account for the effects of debt and changes in working capital.

Institutional-ownership history

Top Owners

2007*

2008*

2009*

Latest*

Dimensional Fund Advisors LP

2,060,992

833,683

1,279,669

1,634,472

Renaissance Technologies

923,256

1,060,688

1,173,497

1,380,229

Kahn Brothers & Co.

895,155

793,156

703,449

1,353,995

Howard S. and Deborah Jonas Foundation, Endowment Arm

948,372

908,372

908,380

908,380

BlackRock (NYSE: BLK  )

31,232

16,791

404,662

874,109

TOP 25 TOTAL

6,719,084

5,215,028

6,411,261

11,080,523

Source: Capital IQ, a division of Standard & Poor's.
*Indicates the number of shares owned.

Valuation is where that cash production makes a difference. According to Capital IQ, IDT trades for 4.6 times its adjusted free cash flow. That's a fair multiple, assuming management can improve cash production by 4.6% or better annually over a sustained period of time. Institutions appear to believe they will.

Many of the top 25 Big Money investors have increased their stakes in IDT over the past year. As a group, they've been regular buyers since last June. Yet no fund manager has bet bigger than BlackRock, which upped its stake from just 1,533 shares last summer to more than 800,000 as of this writing.

Competitor and peer checkup

Company

Institutional Ownership

Insider Ownership

AT&T (NYSE: T  ) 58.6% 0.06%
IDT 49.67% 28.65%
Qwest Communications (NYSE: Q  ) 98.09% 0.47%
Sprint Nextel (NYSE: S  ) 87.97% 0.26%
Verizon (NYSE: VZ  ) 54.42% 0.16%
Vonage Holdings (NYSE: VG  ) 44.51% 25.01%

Source: Capital IQ, a division of Standard & Poor's. Data current as of Nov. 24.

Unlike most of its telephony peers, insiders have a big stake in IDT. Founder Howard Jonas still owns more than 25% of the business, and his endowment is a large institutional owner of the stock. Since Jonas is still CEO, I take that as a good sign. Foolish investors bet with managers who have more to lose than they do.

What makes IDT doubly interesting is its lack of institutional sponsorship. Sure, Wall Street is buying now, but with a market cap of less than $500 million, there are only so many funds able to get in at current levels. As the stock rallies, more institutions will pile in.

In the meantime, suitors may be interested in IDT's pristine balance sheet, which includes $222 million in cash versus just $41 million in debt. Either way, I like the odds that the stock will head higher. That's why I've rated IDT to outperform in my CAPS portfolio.

Now it's your turn to weigh in. Do you think the institutions are wrong about IDT? Let us know what you think using the comments box below. You can also recommend other stocks for me to evaluate by sending me an email or replying to me on Twitter.

Interested in more info on IDT? Add it to My Watchlist.

BlackRock is a Motley Fool Inside Value pick. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy is smarter than the average bear.


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