Seth Klarman is the founder and head of the well-respected Baupost Fund and quite possibly, the world's greatest value investor. It must be noted that much of Baupost's strategies focus on more esoteric asset classes that preclude average investor participation as well as complex vehicles too complicated for normal investors. Because these markets are less efficient, the possibility for above-average returns is higher than common equity markets.
Nevertheless, Klarman's third quarter filing contained some very interesting nuggets as he was overwhelmingly a net buyer, divesting only two positions: Audiovox (VOXX) and CapitalSource (CSE). He did not reduce stakes in any other stock in his portfolio.
HPQ was a name I have been looking at in recent weeks and recent troubles at Hewlett Packard are like chum in the water to value investing sharks. Punished in large part for not communicating well with Wall Street, some of the core businesses such as printers and services remain stable and the case could be made that HPQ was merely going through a rough patch but the business itself is not broken (PC segment notwithstanding). Obviously, Klarman believes this to be the case and his investment is a big endorsement for the company and new CEO Meg Whitman's ability to navigate its course forward. HPQ is Baupost's 2nd largest disclosed equity position.
Novagold is Klarman's second gold stock addition, after Allied Nevada Gold (ANV). Buying gold stocks is a relatively recent development in Baupost's strategy but it fits with public pronouncements that Klarman fears what profligate government spending is out of control. NG is an interesting name to play it as it has far under-performed compared to other gold mining stocks. My surmise is that Klarman agrees with my assessment that most gold stocks are fairly valued -- the only way to get a cheap gold stock is to buy one with known problems specific to that company and Novagold fits that bill. It is interesting to see he did not add to his ANV position, despite the gold sector correction in Q3. Investors seeking to piggyback Klarman's buy should note that NG traded as low $6.45 in Q3 and has gained over a third more value since then.
Other big Q3 moves included a 150% increase to a stake in BP (BP), which is now Baupost's largest disclosed equity position. Klarman also added big to positions in Idenix Pharmaceuticals (IDIX), PDL BioPharma (PDLI) and Sycamore Networks (OTC:SCMR). On an absolute dollar basis these positions are small, totaling $109M compared to Baupost's $466M stake in HPQ.
One strange anomaly in the Baupost filing is Alere (ALR), a healthcare company formerly operating as formerly Inverness Medical Innovations. Shares dropped nearly 50% from Q2's filing to Q3 but Klarman elected to hold pat with his position, neither buying nor selling ALR. One would think in such a situation, Klarman would either find shares more attractive and add to his position or view the price drop as a valid response to changed fundamentals and sold. If a 50% loss in value only dropped shares to "hold" levels, it seems Baupost would have sold before the drop since shares might have been fairly valued.
Readers can view all of Seth Klarman's Q3 2011 moves in spreadsheet format here.