By Michael Barton, Guest Editor Investment Underground
Seth Klarman is the author of the book “Margin of Safety” and invests in a wide variety of instruments; from stocks, to distressed debt, to foreign equities and bonds. His investment philosophy is safety first, and as a portfolio manager with The Baupost Group (founded 1983), he has averaged returns of nearly 20% annually. Klarman is happy to sit on the sidelines waiting for the right opportunity to come along, at the right level of risk. We took a look at some of his newest buys:
Allied Nevada (ANV): Previously a wholly owned subsidiary of Vista Gold Corp., the Basic Materials company is the owner of Hycroft Mine amongst several other Nevada properties. It seeks opportunities to explore, drill and develop potential properties into operating mines. Klarman holds 2,456,398 shares, equivalent to about 4.93% of his portfolio. ANV stock rose 0.62% at the time of writing to $38.75 less than $5 from its 52 week high of $43.49, and has a market cap of $3.4 billion. It has a P/E ratio of 76.2.
Klarman has made a good move purchasing ANV stock. The big news is the value of its resources, not its EPS. Hycroft has proven resources of 2.6 million ounces of gold, and 49.3 million ounces of silver. Silver is considered a by-product, and therefore has no associated production cost. For every $100 increase in the price of gold, 30% could be added to the share price. With gold at all time highs of around $1600 an ounce the prospects look exciting.
Competitors include US Gold (USG), who is reporting losses but has potential in resource growth and production. It is acquisitive, which has its own risks. New Gold (NGD) has three mines in US, Mexico, and Australia, and has similar costs of production to ANV and will benefit by a similar amount to ANV as the gold price rises.
Smaller miners are more attractive than the larger, eg Barrick Gold (ABX) as they are considered acquisition targets.
Sycamore Networks (OTC:SCMR): Sycamore Networks develops and markets intelligent Bandwidth Management solutions for fixed line and mobile operators worldwide. Shares depreciated 2.27% on the day to $21.06 at the time of writing. The company has been struggling recently, with three of he last four earnings reports coming in lower than expectations. Revenue in the quarter ended April 30, 2011, was down to $11.9 million from $14.6 million in the comparable period in 2010.
With competitors as diverse in size as Oplink (OPLK), Digi International (DGII), Cisco (CSCO), and Alcatel Lucent (ALU), all of which are ahead of Sycamore’s earnings curve, it is hard to find a competitive edge for Sycamore. However, it may become a takeover target, or perhaps surprise on the upside at its next results. Time will tell if Klarman’s holding of 100,000 shares, representing approximately 0.14% of his portfolio is a shrewd investment.
PDL Biopharma (PDLI): Founded in 1986 as Protein Design Laboratories, it changed its name to PDL Biopharma in 2006. It manages humanization antibody patents and royalty assets. Its patents cover humanized antibodies, methods for humanizing antibodies, polynucletide encoding in humanized antibodies, and methods of producing humanized antibodies.
On the day of writing, shares held steady at $6.26. Its earnings per share of $0.64, give an undemanding P/E ratio of 9.50, and with a dividend yield of 9.6%, the shares could be chased for income. It has filed a suit against Roche and Genentech, partners in 3 drugs, which has just been refused dismissal by the second Judicial District Court of Nevada. Any positive outcome of the lawsuit will be earnings positive, and it would seem that any bad news is already priced into the shares.
In a market place dominated by its larger peers, such as Amgen (AMGN) and Biogen (BIIB), both trading at higher multiples and lower dividend yield numbers, Klarman’s holding of 10,495,225 shares, representing 3.44% of his portfolio, look good value.
AVEO Pharmaceuticals, Inc. (AVEO): AVEO Pharmaceuticals Inc was founded in 2001 as GenPath Pharmaceuticals Inc, and changed its name in 2005. With a market cap of $7.9 million it is a small niche player in the Biotechnology sector. It concentrates its activities on the discovery and development of cancer therapeutics, and has strategic partnerships with OSI Pharmaceuticals (OSIP), Merck (MRK), and Biogen Idec Inc. (BIIB). With n EPS of $1.23, and PE ratio of 16.34, its share price of $20.01, up 0.15% on the day of writing, does not look too demanding.
It recently offered for sale 5.8 million shares at $17.50, after securing a partnership with Japanese drug maker Astellas with an up front payment of $125 million. Whilst the need to raise more money indicates a severe short-term cash burn, the terms of the deal could net AVEO up to £1.3 billion. Competing with Amgen (AMGN), such a deal makes this an attractive play in this sector. Klarman holds 3,525,000 shares, 2.66% of the portfolio.
Alere Inc. (ALR): Alere was founded as Inverness Medical Innovations in 2001, and changed its name as recently as July 2010. Holding 3,100,000 shares, 6.86% of his portfolio, Klarman may have made a star buy here. The company is acquisitive, building up a portfolio of products in the medical diagnostic field. Its latest target is Axis Shield, a Scottish diagnostics group. Rejected at present, its offer may have to be raised to more than $400million to secure a deal. Axis Shield currently gas revenues of $97million, and this should increase by $13million by 2013 with its new Lipids Panel allowing point of call testing for diabetes and cholesterol.
Analysts expect shares to rise to $45 next year from their current $36.95, up 0,05% on the day of writing, before the Axis Shield acquisition is taken into consideration. Shares are 10% below their 52 week high of 41.18.
Syneron Medical Ltd (ELOS). Syneron manufactures and sells ablative and non ablative medical aesthetic devices for a range of skin conditions. It markets to plastic surgeons, family practitioners, and medical spas worldwide. With a holding of 1,500,000 shares, 1.11% of the portfolio, Klarman has bought into a company that has bought an earnings positive rival (Candela), which should boost its own earning to positive in 2012. The acquisition of Candela was made in an all share deal, and should boost its EPS to 31cents per share next year on revenue rising to $245.7million. Analysts have a price target of $18.25 for its shares next year, though these fell 4.21% this week to $11.37, and it looks set to outshine its main rivals, Cutera (CUTR) and Cynosure (CYNO).