Top Buys and Sells of Baupost's Star Manager Seth Klarman

by: GuruFundPicks
Summary: Hedge Fund Baupost with $1.6 billion in equity assets and headed by Stellar Investor Seth Klarman has returned market-beating over 20% compounded returns and is ranked fifth among hedge funds for generating the most gains for his investors since fund inception. Four attractive buys from his portfolio include satellite and wireless telecommunications systems and services provider Viasat (NASDAQ:VSAT), biotech Theravance Inc. (THRX), medical products provider Alere Inc. (NYSE:ALR) and Israel-based Ituran Location & Control (NASDAQ:ITRN). Furthermore, telecommunications products provider Audiovox Corp. (NASDAQ:VOXX) is a top sell by Baupost.
Boston-based Hedge Fund Baupost Group LLC, headed by star Manager Seth Klarman, manages $23 billion with $1.6 billion of that invested in equities using a value investing philosophy. He has generated over 20% compound annual returns for his investors, and was ranked fifth in an article by the Financial Times in generating the most net gains at $12.5 billion for his investors since fund inception. In the crisis of 2008/09, while most hedge funds lost assets, Baupost managed to double its assets by focusing on corporate bonds. Seth Klarman’s investment methodology is detailed in his book "Margin of Safety" that sells on Amazon for $2,400.
The fund holds a concentrated portfolio of 17 positions, with two-thirds of its holdings in small-caps, 25% in large-caps, while mid-caps account for the remaining 10%. Its portfolio turnover is 50% implying an average holding period of two years. Based on the most recent SEC 13-F filing for the March 2011 quarter, we determined that its portfolio is mostly concentrated in the healthcare and technology sectors that together account for two-thirds of its holdings, and another 20% of its holdings are in the service sector.
The following summarizes its largest new buys and sells in the latest reported 13-F filing for the March 2011, quarter, updated based on any 13-G filings since the end of the quarter. As you will see, four of Baupost’s holdings are attractive buys, and one is a conviction sell:
  • Technology sector: Buy Viasat Inc. (VSAT) and Sell Audiovox Corp. (VOXX). Baupost maintained its technology position at $420 million with no significant additions or cuts to its technology positions during the quarter. Its largest position in the portfolio is in Viasat Inc., a manufacturer of satellite, wireless communications, and networking systems for government and commercial systems. Baupost opened the position in the low-$20s in mid-2008, and it continues to hold that position without taking anything off the table as the stock traded in the mid-$40s last quarter. At $400 million, almost a quarter of VSAT outstanding shares are held by Baupost and it is probably its highest conviction holding. VSAT trades at a fair 22 times forward price-to-earnings (P/E), about mid-to-top range based on its historical PE range. However, there is optimism around the stock with the upcoming launch of the ViaSat-1 satellite that will transform the company from primarily a product supplier to the government to primarily a service provider for consumers, and that transformation may not be fully reflected in current analyst estimates and price targets. Besides VSAT, Baupost also holds minor positions in Sycamore Networks Inc. (NASDAQ:SCMR) that is a developer of intelligent bandwidth management solutions for fixed line and mobile network operators worldwide, including a portfolio of optical switches, and Audiovox Corp. (VOXX) that distributes mobile video systems, satellite radios, recorders, speakers, LCD displays, cables, antennas and power cards. The position in VOXX was bought in the low-teens at the end of 2007, and it continues to unload that position selling another 200,000 shares since the end of the March 2011, quarter as indicated in a follow-on SC-13G filing as the price dropped in the $8 range. It has been on the wrong side of this position, since it bought it at the end of 2007, and the stock continues to under-perform as sales and operating earnings continue to weaken year-over-year. This is a conviction sell.
  • Service Sector: Buy Ituran Location & Control (ITRN). Baupost maintained its service sectors position at $340 million from the prior quarter. News Corporation (NASDAQ:NWSA) is its largest position in the sector at $335 million, and the second largest position in its portfolio. Baupost opened the position in the high-teens in mid-2005, and it has been on the wrong side of this position, so Baupost continuing to hold this large position does not have much informative value. Furthermore, Baupost also holds 7.2% of the outstanding shares or $25 million of Ituran Location & Control (ITRN), an Israeli provider of stolen vehicle recovery and tracking services and wireless communications products. It opened the position in the low-teens in the summer of 2007, and the stock has been volatile since having dropped as low as $6 in 2008/09 market correction and has since tripled, so Baupost continuing to hold such a large stake in the company after a huge rally is a sign of conviction in its holding. ITRN trades at an attractive 12 times forward P/E while growing revenue and earnings in the 15%-20% range.
  • Healthcare sector: Buy Theravance Inc. (THRX) and Alere Inc. (ALR). Baupost sold $390 million of its prior quarter $1.01 billion position in the healthcare sector. It sold out of its prior quarter $45 million position in biotech Regeneron Pharmaceuticals (NASDAQ:REGN). The position was opened in the mid-$20s in the summer of 2010, and it probably sold out in the $40 range last quarter, so this was just profit-taking. Furthermore, Baupost added to its prior quarter positions in biotech PDL Biopharma Inc. (NASDAQ:PDLI) and Aveo Pharmaceuticals (NASDAQ:AVEO); both positions were opened at the end of 2010, and are indicative of Baupost’s conviction in its buy decision. Furthermore, Baupost holds a large $315 million position in biotech Theravance Inc. (THRX) that was opened in the mid-teens in early 2008, and a $120 million position in Alere Inc. (ALR), a developer of diagnostic products in the areas of infectious disease, cardiology, oncology, drug abuse and women’s health, that was opened in the $30 range in the summer of 2010. THRX traded in the high-$20s last quarter and ALR traded in the $40 range last quarter, so Baupost continuing to hold these positions without any profit-taking is indicative of Baupost’s conviction in its hold decision. Baupost holds a 17.4% of the outstanding shares of THRX and it is a large conviction holding for it. Furthermore, ALR is projected to exhibit strong double-digit revenue and earnings growth going forward and trades at a very attractive forward 12 P/E, near the low-to-mid-end of its historic P/E range.
  • Basic Materials sector: Baupost added its only position in the group at $87 million in Allied Nevada Gold Corp (NYSEMKT:ANV) that is engaged in the exploration, acquisition, development and operation of gold properties in Nevada. Baupost typically invests in the healthcare and technology sectors, and the stock has corrected since its buy, so we would not be drawing too much inference from this buy.
Market Value at end of March 2011 Quarter
Change in Value from Prior Quarter
Percent of Portfolio
Percent Shares Owned
Top Buys and Sells
Allied Nevada Gold Corp.
$ 87 million
$87 million
Regeneron Pharmaceuticals
$ 0 million
($45) million
Capitalsource Inc.
$ 74 million
($39) million
Breitburn Energy Partners LP
$ 66 million
($29) million
PDL Biopharma Inc.
$ 61 million
$28 million
Aveo Pharmaceuticals Inc.
$ 47 million
$20 million
Top Holdings
Viasat Inc.
$ 400 million
$0 million
News Corp.
$ 335 million
$0 million
Theravance Inc.
$ 315 million
$0 million
Alere Inc.
$ 121 million
$0 million
Enzon Pharmaceuticals Inc.
$ 98 million
($1) million
Alliance One Intl Inc.
$ 35 million
$0 million
Ituran Location And Control
$ 25 million
($1) million
Syneron Medical Ltd.
$ 20 million
$0 million
Multimedia Games Hldg.
$ 15 million
$0 million
Audiovox Corp.
$ 8 million
$0 million
Sycamore Networks Inc.
$ 2 million
$2 million
Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and The information and data is believed to be accurate, but no guarantees or representations are made.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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