By Matt Doiron
The Baupost Group is one of the largest hedge funds in the world. It is managed by Seth Klarman, a value investor whose book Margin of Safety - published in 1991 - has sold for up to $1,500 a copy. Baupost is required to file 13Fs six to seven weeks after the end of each quarter, disclosing many of its long equity positions. While 13F filings are from several weeks ago, there are still a few ways for investors to use the filed information. We have found, for example, that the most popular small cap stocks among hedge funds outperformed the market by 18 percentage points even though we started measuring the returns a couple of weeks after 13Fs have been made public (check out the details here). It can also be productive to treat individual 13Fs as free recommendations from fund managers - not necessarily to be followed, but to be considered briefly and then researched further if they seem appealing. We have gone through the recently released 13F for the end of December in order to discuss Klarman's top stock picks so that investors can know what he has liked recently and then add these stocks to their own portfolios if they check out upon further research. Read on for a brief summary of each stock pick and compare them to previous filings:
Baupost trimmed its stake in BP plc (BP) by 3% but at almost 11 million shares it was still the fund's largest 13F holding by market value. BP is down 11% in the last year, and the business has been struggling. It is now starting to look very much like an income stock with a dividend yield of about 5%, though of course the oil super major is sensitive to oil prices and therefore the overall economy. BP had made our list of the most popular energy stocks among hedge funds for the fourth quarter of 2012 (see the most popular energy stocks among hedge funds). At 7 times consensus earnings for 2014 it is cheaper than many of its peers.
The fund reported a position of 11 million shares in ViaSat, Inc. (VSAT), a $2.1 billion market cap communication equipment and services company. Viasat is unprofitable on a trailing basis, but Wall Street analysts expect it to earn 90 cents per share in the fiscal year ending in March 2014 and this gives it a forward earnings multiple of 53. That would still be expensive unless there was high, sustainable growth, but Viasat did experience a 40% increase in revenue in the fourth quarter of 2012 versus a year earlier. 19% of the outstanding shares are held short, so many market players are bearish on the stock.
Oracle Corporation (ORCL) was another of Klarman's largest holdings, despite the fact that Baupost sold shares between October and December. Billionaire Ken Fisher's Fisher Asset Management is another major investor in Oracle, owning almost 20 million shares at the beginning of 2013. In its most recent quarterly report, net income was up considerably compared to the same period in the previous fiscal year, and the trailing P/E is 17. At that price we think it is worth looking into the sources of recent earnings growth - sales were actually not up by much - to see if Oracle could be a good buy.
Klarman and his team were buying shares of News Corp (NWSA) (NWS), and closed December with about 13 million shares of the media company in the portfolio. News Corp has been popular among many value investors who like the prospects of the impending breakup of the company. The breakup would leave independent companies who - in theory, and has often been found to be the case for spinouts - would be able to create shareholder value due to more focused management. At 17 times trailing earnings, News Corp. doesn't look particularly expensive on its own merits either.
Baupost owned a bit less than 14 million shares of Theravance Inc (THRX). Theravance is another smaller-cap stock, with a market capitalization of just over $2 billion. It is a biotechnology company with multiple treatments for asthma in development. Short interest is high here as well, with the most recent data showing that 23% of the outstanding shares are short. Net losses are expected to be particularly steep this year before easing in 2014, though the consensus is for Theravance to remain in the red. That seems a bit speculative for us and we would recommend avoiding the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.