Seth Klarman is an investor that I'd love to emulate. Klarman has compounded money at prodigious rates for a couple of decades while often sitting on a large cash balance and always steering clear of wealth destroying bubbles. In other words he achieves leading returns while taking less risk of permanent capital loss.
The problem with trying to emulate Klarman is that it is very difficult to know what the heck he is up to. Most of the time the majority of the capital he manages for Baupost is not invested in securities that show up in quarterly SEC filings.
This quarter though we get lucky. Baupost has taken a chunky position in two blue chip companies that we can all understand, BP plc (BP) and Microsoft (MSFT). Here is the link to the supporting SEC filing.
Below is a summary of quarterly movements in positions that Baupost must disclose in which it had over $100 million invested at the end of June 2011:
|Alere Inc (ALR)||$113,522,000||3,100,000||$121,334,000||3,100,000||0|
|Allied Nevada Gold (ANV)||$119,490,000||3,378,300||$87,153,000||2,456,398||921,902|
|BP PLC (BP)||$243,595,000||5,500,000||$0||0||5,500,000|
|News Corp (NWSA)||$337,185,000||19,050,000||$334,899,000||19,050,000||0|
|Theravance Inc (THRX)||$287,866,000||12,961,100||$314,860,000||13,000,000||(38,900)|
|Viasat Inc (VSAT)||$434,928,000||10,051,492||$400,451,000||10,051,492||0|
There you see them. Two big buys. And two big buys of companies where I think the rest of us mortal investors can wrap our heads around the value proposition.
And even better, we can buy now at prices at least as good as if not better than what Klarman bought at. Have a look at the Q2 ranges of both companies where Klarman was buying and where the stock prices are roughly today:
- Q2 Price Range - $23.70 to $26.70
- Current - $25.43
BP plc (BP)
- Q2 Price Range - $42.46 to $46.95
- Current - $41.56
Microsoft - Investment Thesis
Before considering why Microsoft is attractive today, just consider a sample of who owns it as a pretty major position in their portfolio. Here are just a few:
- Goodhaven (Pitkowsky/Trauner)
- Jim Grant / Jeremy Grantham
- And you can add Einhorn, Tilson and others to the list.
Why do all of these respected owners have a position in Microsoft? I think it is pretty simple. A Fort Knox balance sheet and a business with a moat around it, available at a cash flow multiple that you would expect on a very average business.
At current prices if you net out the big cash balance on the balance sheet Microsoft is being valued at a cash flow multiple in the single digits. I don't know about you, but I think that cash flow stream is going to be pretty strong for a long, long time and should command more respect. With a nice dividend yield and regular stock buybacks Microsoft is pretty close to no-brainer territory.
BP - Investment Thesis
Like Microsoft, BP isn't exactly a hidden gem. Both of these companies rank amongst the very largest in the world.
I'll admit to being a little surprised to see Klarman buying BP now after not having bought immediately after the Macondo spill when it was available at even better prices.
Interestingly, the above-mentioned Einhorn also added BP in 2011 well after the share price had rebounded somewhat from the oil spill. There was an article earlier in the year that provided some detail into why Mr. Einhorn found the stock price attractive:
The Deepwater oil spill in April 2010 caused a significant decline in BP's share price. BP reserved nearly $40 billion pre-tax to account for costs related to this accident and has thus far sold $22 billion of non-core assets (with a stated target of up to $30 billion in divestitures), leaving the balance sheet in excellent shape. Pro forma for these asset sales and after taking into account our estimate of BP's eventual oil spill related expenses, we expect BP will be able to earn nearly $20 billion per year from continuing operations. At less than 7x pro forma earnings, we purchased BP at a 25% discount to its peers.
I should note that Einhorn's purchase price was around $41 which is where BP still trades.
The BP thesis really isn't much more complicated than the one for Microsoft. The one added complication is whatever remains from the oil spill litigation. At this point it seems that the consequences of which will be quite manageable.
Like Microsoft then, success in BP is simply a matter of the market assigning a more appropriate multiple to the earnings power of this mega cap dominant company. Once BP returns to its pre-Macondo dividend level the yield at current prices will be 8.1%. A look at the other major oil companies suggests anything over 5% is unlikely meaning there is likely at least a 50% upside in the BP stock price.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.