Seth Klarman, founder and president of The Baupost Group, is the author of Margin of Safety and one of the most widely respected value-oriented investors. Since inception in February 1983, The Baupost Group has delivered a compounded annual return of approximately 20%.
The following are Klarman's top 10 investment ideas, based on our proprietary MOI Signal Rank methodology. MOI Signal Rank answers the question, “What are this investor’s top 10 ideas right now?” Rather than simply presenting each investor’s largest holdings as of the recently filed quarter's end, our proprietary methodology ranks the companies in a portfolio based on the investor’s current level of conviction, as judged by our proprietary methodology. The latter takes into account a number of variables, including the size of a position in an investor’s portfolio, the size of a position relative to the market value of the corresponding company, the most recent quarterly change in the number of shares owned, and the change in the stock price of a position since the most recent quarterly filing date.
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MOI Signal RankTM - Top Ideas of The Baupost Group
Alere (ALR) ($37 per share; MV $3.2 billion; EV $5.9 billion), based in Waltham, MA, provides at-home products and services in near-patient diagnosis, monitoring and health management. The focus is on cardiology, women’s health, infectious disease, oncology and toxicology. The company offers rapid diagnostic tools combined with healthcare services. It operates in three segments: Professional diagnostics, health management and consumer diagnostics. Services revenue rose 25% from $528 million in 2009 to $662 million in 2010, while total revenue rose 12% to $2.2 billion during the period. The Street expects Alere to earn $2.65 per share in 2011 (14x P/E), with $3.05 (12x) and $3.57 (10x) in the following years. Management expects new products to contribute more than $300 million in incremental revenue per year by 2013 (see slide 15 of Alere's investor presentation).
Alliance One (AOI) ($3.30 per share; MV $289 million; EV $1.4 billion), based in Morrisville, NC, is one of only two global publicly held leaf tobacco merchants, each with roughly one-half of the market. The company's customers include all of the major consumer tobacco makers. Adjusted operating income dropped 30% from $224 million in the fiscal year ended March 31, 2010 to $156 million in FY11, while revenue declined 9% during the period. The Street expects Alliance One to earn $0.25 per share in FY12 (13x P/E). The company trades at 1.1x tangible book value of $272 million.
Allied Nevada Gold (ANV) ($35 per share; MV $3.1 billion; EV $2.8 billion), based in Reno, NV, owns the Hycroft Mine near Winnemucca, Nevada, with a proven and probable reserves of 2.6 million ounces of gold and 49.3 million ounces of silver (the property resides on 96 square miles). The mine reopened in 2007, and in 2010, the company began an accelerated mining plan, essentially tripling the 2009 mining rate over a three-year period. The expansion will increase annual production from 130,000 ounces of gold in 2011 to over 260,000 ounces of gold in 2012. The accelerated mining rate implies a six-year mine life; the company is pursuing additional exploration in order to extend the mine life. The average gold price per ounce rose 26% from $972 in 2009 to $1,225 in 2010, while revenue jumped 203% in the period. The Street expects Allied Nevada to earn $0.60 per share in 2011 (58x P/E), followed by $1.63 (21x) and $1.57 (22x) in the following years. If the company can indeed accelerate production according to management expectations, and if gold prices remain firm, consensus EPS estimates may prove overly conservative.
Audiovox (VOXX) ($7.50 per share; MV $173 million; EV $91 million), based in Hauppauge, NY, is an international distributor in the accessory, mobile and consumer electronics industries. Electronics sales rose 11% from $375 million in the fiscal year ended February 28, 2010 to $415 million in FY11, while total revenue increased 2% to $562 million during the same period. The Street expects Audiovox to earn $0.74 per share in FY12 (10x P/E) and $0.97 in 2013 (8x). The company has $83 million of net cash (48% of market value) and $286 million of tangible book value. Baupost recently filed an amended 13G, in which it indicated that it had reduced its holding in Audiovox to 4%. As a result, the company should not be viewed as one of Klarman's top ideas going forward.
AVEO Pharma (AVEO) ($20 per share; MV $840 million; EV $630 million), based in Cambridge, MA, is a cancer therapeutics company whose product candidates are directed against mechanisms involved in cancer. The company's lead product candidate, Tivozanib, on which AVEO has partnered with Astellas Pharma (ALPMF.PK), is designed to provide an optimal blockade of the vascular endothelial growth factor pathway. Under the Astella collaboration deal, signed in February, AVEO received an initial cash payment of $125 million. Importantly, the company is eligible to receive from Astellas $1.3 billion in milestone payments relating to the development and commercialization of Tivozanib. R&D expenses surged 67% from $51.8 million in 2009 to $86.3 million in 2010, while revenue jumped 116% during the same period. The Street expects AVEO Pharma to lose $0.02 per share in 2011.
Multimedia Games (MGAM) ($4.60 per share; MV $124 million; EV $138 million), based in Austin, TX, provides standalone and networked gaming systems. The standalone player terminals, video lottery terminals and other systems are used by Native American and commercial casino operators as well as state lottery operators in North America, while the standalone player terminals are deployed internationally. The company's gaming units in operation declined 19% from 16K at the end of the fiscal year ended September 30, 2009 to 13K at yearend FY10. The Street expects Multimedia Games to earn $0.05 per share in FY11 (92x P/E), with $0.20 (23x) and $0.25 (18x) over the next two years. The company trades at 1.5x tangible book value of $83 million.
News Corp. (NWSA) ($18 per share; MV $48 billion; EV $51 billion) is Rupert Murdoch's global media company with operations in seven major industry segments: filmed entertainment (Twentieth Century Fox), television (Fox), cable network programming, direct broadcast satellite television (SKY Italia), integrated marketing services, newspapers and information services (Dow Jones, New York Post), and book publishing (HarperCollins). The company also owns 39% of BSkyB and 32% of Hulu. Revenue from television, cable network programming and direct broadcast satellite television increased 8% from $14 billion in the fiscal year ended June 30, 2009 to $15 billion in FY10, while total revenue increased 8% to $32.8 billion during the period. Analysts expect News Corp. to earn $1.12 per share in FY11 (16x P/E), followed by $1.33 (14x) and $1.58 (11x) in each of the next two years, respectively. News Corp. shares could become interesting if fallout from the UK phone hacking scandal puts pressure on the stock price in the near term. News Corp. announced yesterday that it will close its 168-year-old tabloid News of the World, which has been implicated in the scandal.
PDL BioPharma (PDLI) ($5.90 per share; MV $820 million; EV $1.2 billion), based in Incline Village, NV, manages a portfolio of antibody humanization patents and royalty assets and receives royalties on sales of a number of humanized antibody products marketed today; it also may receive royalty payments on additional humanized antibody products launched before final patent expiry in 2014. Cash dividends per share plummeted 63% from $2.67 in 2009 to $1.00 in 2010, while revenue increased 8% in the period. The Street expects PDLI to earn $1.18 per share in 2011 (5x P/E), with $1.35 (4x) and $1.54 (4x) in subsequent years. The indicated dividend of $0.60 per share implies a yield of 10%. Klarman discussed his thesis on PDL in a March 2009 videoconference (watch the video).
Theravance (THRX) ($23 per share; MV $1.9 billion; EV $1.8 billion), based in South San Francisco, CA, is a biopharma firm with a pipeline of internally discovered product candidates and strategic collaborations with pharma companies. Theravance focuses on small molecule medicines across a number of therapeutic areas, including respiratory disease, bacterial infections, and the central nervous system. R&D expenses decreased 3% from $77.5 million in 2009 to $75.1 million in 2010, while revenue remained roughly flat at $24 million during the same period. The Street expects Theravance to lose $1.22 per share in 2011.
ViaSat (VSAT) ($44 per share; MV $1.8 billion; EV $2.1 billion), based in Carlsbad, CA, provides advanced satellite and wireless communications and secure networking systems. Customers include the U.S. government, aerospace and defense contractors, network integrators and communications service providers. A large portion of revenue comes from the Department of Defense and other federal government agencies (90% of government contracts are fixed-price deals). Service revenues, including the December 2009 acquisition of WildBlue, jumped 168% from $104 million in the fiscal year ended April 2, 2010 to $278 million in FY11, while total revenue rose 17% to $802 million during the period. The Street expects ViaSat to earn $1.07 per share in FY12 (41x P/E), followed by $1.84 (24x) and $3.42 (13x) in each of the next two years, respectively.