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Seth Klarman, the author of Margin of Safety, is a graduate of Cornell. He earned his MBA from Harvard Business School. Klarman leads the Baupost Group, a Boston-based private investment partnership. Unlike most legendary investors, Klarman is not hesitant to hold cash. There have been times when cash holdings constitute more than 50% of the portfolio. Since its inception, Baupost Group was able to beat the market with an annual return of 20%. Klarman looks for opportunities raised by market mispricing. He looks for cheap stocks when markets’ overreact to contemporary news. This overreaction provides opportunities to buy stocks with great margin of safety.

According to the latest filings of Baupost Group submitted to I-Metrix Edgar-Online, Klarman initiated four new purchases, increased positions in eight stocks, and reduced positions in five stocks. I have examined his six buys and one sell from a fundamental perspective, adding my O-Metrix Grading System where possible.

Company Name

Ticker

Shares Held

% Change

% of Portfolio

O-Metrix Score*

Microsoft

MSFT

12 million

NEW

14.67%

7.41

BP PLC

BP

5.5 million

NEW

10.17%

8.38

Allied Nevada Gold

ANV

3.38 million

37.53%

6.90%

N/A

Syneron Medical

ELOS

3.84 million

155.74%

1.87%

N/A

Central Pacific Financial

CPF

1.80 million

NEW

1.09%

N/A

PDL Biopharmaceuticals

PDLI

14.72 million

40%

around 4%

19.05

Breitburn Energy Partners

BBEP

2.5 million

-17.25%

2.17%

N/A

Data obtained from Finviz/Morningstar and is current as of Aug. 26. Click here for more information on O-Metrix Grading System. iFrame Graph link here.

Microsoft lost 8.35% in the last month, but returned 2.64% in the last quarter. Baupost Group initiated a new purchase of 12 million shares and invested 14.67% of its portfolio in Microsoft. Microsoft is among the cheapest technology stocks in the market. It is trading with a low P/E ratio of 9.35 and a lower forward P/E ratio of 8.04. It is a highly profitable company with a gross margin of 77.73% and a net profit margin of 33.10%. Dividend yield is 2.53%. I see a great margin of safety in Microsoft stocks. My FED+ Fair value range for Microsoft is $40-46. Based on an annualized EPS growth estimate of 10.37%, Microsoft has an O-Metrix score of 7.41. (Full analysis here.)

BP lost 14.41% in the last month and 15.32% in the last quarter. The year-to-date return is -11.08%. Baupost Group initiated a new purchase of 5.5 million shares and invested 10.17% of its portfolio on British Petrol. Since the oil spill disaster in the Gulf of Mexico, BP became one of the most hated stocks in the market, offering a deeper value to those interested. Analysts have a mean target price of $56, implying almost 56% upside potential. The stock is trading with a low trailing P/E ratio of 6.03 and a forward P/E ratio of 5.19. Dividend yield is 4.4%. Based on 5% EPS growth estimate, BP has an O-Metrix score of 8.38.

Allied Nevada Gold has been an outperformer, returning 10% in the last month and 16% in the last quarter. Year-to-date return is 60.32%. Baupost Group owns 3.38 million shares and increased its holdings by 37.53% in the last quarter. 6.90% of the portfolio is invested in Allied Nevada Gold. The stock is trading with a sky-high P/E ratio of 281.20 and a forward P/E ratio of 25.88. Its 52-week trading range is $21.90-43.49. While the debt/equity ratio is 0.05, the company has only $3.42 of cash per share and it is trading 7.13 times its book value. Analysts are still bullish on the stock. The mean analyst target price of $50.24 imply 16% upside potential.

Syneron Medical has been deeply affected from the recent sell-off. The stock lost 16.90% in the last month and 20.75% in the last quarter. Baupost Group increased its holdings by 155.74% and invested 1.87% of its portfolio on Syneron Medical. Analysts have a mean target price of $18.25, implying about 80% upside potential. As of the August 26 close, the stock is trading with a sky-high trailing P/E ratio of 1008 and a forward P/E ratio of 43.18. The company has no debt issues: Debt/equity ratio is 0 whereas the current ratio is 4.09. 52-week trading range is $7.96-14.92.

Central Pacific Financial is a regional bank, headquartered in Hawaii. The stock has been falling off the cliff for a while. It has a 52-week trading range of $10.11-53. While it is trading 23% above a 52-week low, it is also trading 76% lower than a 52-week high. Baupost Group initiated a new purchase of 1.8 million shares in the last quarter. The balance sheet has several red flags. Sales are down by 14% over the last quarter. Debt/equity ratio of 0.97 signals serious debt issues. Nevertheless, both insiders and institutions are bullish about the company. Insiders own 0.59% of the company and increased their holdings by 40% in the last six months. Institutions own 72.60% of the company and increased their holdings by 25.51% in the last quarter. An acquisition or merger possibility might justify this bullishness.

PDL Biopharmaceuticals lost 6.66% in a month and 10.44% in a quarter. Baupost reduced its PDL holdings by 11.75% in the second quarter, but increased its ownership after this period. According to a recent 13G filing, Baupost owns 14.72 million shares with an ownership stake of 10.53%. PDL is a biotechnology company headquartered in Incline Village, Nevada. The company is trading with a low P/E ratio of 8.33 and a lower forward P/E ratio of 4.26. Based on 14% annualized EPS growth estimate, it has a PEG ratio of 0.6 and an O-Metrix score of 19.05. It is quite amazing to see that the company pays 10.43% yield when it has some serious debt issues. I would have expected it to pay its debt instead of distributing cash. Book value per share of -$2.09 is a strong red flag.

Breitburn Energy Partners lost 3.55% in a month and 11.58% in a quarter. Baupost Group reduced its holdings by 17.25% in the last quarter, but it still invested 2.17% of the portfolio on Breitburn. The stock has a 52-week trading range of $14.73-21.78. At a price of $17.94, it is trading at the middle of its 52-week trading range. Dividend yield of 9.42% is nifty. Analysts’ mean target price of $23.21 implies an almost 30% upside potential.

Find more information on O-Metrix Grading System here.

Source: 6 Big Buys And 1 Big Sell By Seth Klarman