Tracking Seth Klarman's Baupost Group Holdings - Q1 2016 Update

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Includes: ACOR, AGN, AIG, AR, ATRA, BEAV, BITI, BXE, CHK, DVMT, FOX, FOXA, FTR, FWP, GNW, IMOS, INVA, KERX, KIN, KLXI, KOS, LNG, LNGLY, LQ, MU, NG, OCN, OLN, OREX, PBF, PRTK, PYPL, RUN, SEMI, SN, SRAQU, SUNEQ, TBPH, TMQ, VMW, VRTV, VSAT
by: John Vincent

Summary

Seth Klarman’s US long portfolio increased from $5.51 billion to $6.92 billion this quarter.

Baupost Group added Allergan plc and increased EMC Corporation, Cheniere Energy, and Twenty First Century Fox during the quarter.

The portfolio continues to be heavily concentrated, with the top three positions accounting for ~47% of the entire US long portfolio.

This article is part of a series that provides an ongoing analysis of the changes made to Baupost Group's U.S. stock portfolio on a quarterly basis. It is based on Klarman's regulatory 13F Form filed on 05/13/2016. Please visit our Tracking Seth Klarman's Baupost Group Holdings article for an idea on how his holdings have progressed over the years and our previous update for the fund's moves during Q4 2015.

Baupost Group's US long portfolio increased 25.60% from $5.51 billion to $6.92 billion this quarter. The total number of 13F securities held increased from 35 to 36. The portfolio is heavily concentrated, with EMC Corporation (EMC), Cheniere Energy (NYSEMKT:LNG), ViaSat Inc. (NASDAQ:VSAT), Antero Resources (NYSE:AR), and Allergan plc (NYSE:AGN) together accounting for around 61% of the 13F holdings.

Since inception (1982), Baupost Group's US long portfolio has accounted for between 2.4% and 15% of the Assets Under Management (AUM). The current allocation is at the high-end of that range. The rest of the AUM is diversified among cash, debt, real estate, and hedges. The fund continues to hold well over a quarter of the AUM in cash. Seth Klarman's distinct investment style is elaborated in his 1991 book "Margin of Safety: Risk-averse value investing strategies for the thoughtful investor". The book is out of print, and copies sell for a huge premium.

New Stakes

Allergan plc: AGN is a large top-five 6.66% of the US long portfolio stake established this quarter at prices between $266 and $299. The stock currently trades below the low end of that range at $223. For investors attempting to follow Baupost, AGN is a good option to consider for further research.

VMware Inc. (NYSE:VMW): VMW is a 1.70% of the portfolio stake purchased this quarter at prices between $43.84 and $57.02. The stock is now just outside that range at $57.92.

Note: Klarman's largest 13F position is EMC Corporation, which is getting bought by Dell. The group's VMware stake will increase significantly when that transaction closes, as the terms call for EMC shareholders to receive 0.111 per share in VMW tracking stock.

Genworth Financial (NYSE:GNW), La Quinta Holdings (NYSE:LQ), and Silver Run Acquisition (NASDAQ:SRAQU): These are very small (less than ~1% of the portfolio each) stakes established this quarter.

Stake Disposals

Frontier Communications (NASDAQ:FTR) and PFD CNVTs: FTR was a small 1.57% stake established in Q2 2015 at prices between $4.80 and $7.50. It was reduced by ~19% last quarter at prices between $4.50 and $5.40 and eliminated this quarter at prices between $3.94 and $5.79. The stock is now at $5.26.

Kosmos Energy (NYSE:KOS): A very small 0.44% KOS position was purchased in Q2 2014 at prices between $10.05 and $11.23. Q4 2014 saw a ~52% increase at prices between $7.09 and $10.25. There was an about-turn in Q2 2015, as ~17% of the stake was sold at prices between $7.91 and $9.78. That was followed with a ~23% reduction last quarter at prices between $4.73 and $7.81. The elimination this quarter was at prices between $3.50 and $6.12. The stock currently trades at $5.01.

Micron Technology (NASDAQ:MU): As of Q3 2014, MU was Klarman's largest position at 30.82% of the US long portfolio. The stake was first established in Q2 2013 at prices between $9.10 and $14 and increased by just over 50% in Q3 2013 at prices between $12.55 and $17.60. Q4 2014 saw an about-turn, as ~62% of the position was sold at prices between $27.03 and $36.49. In Q3 2015, the remaining stake was almost eliminated at prices between $14.06 and $20.12. The stock currently trades at $9.56. Klarman's timely exit netted huge long-term gains. The minutely small remainder stake was sold this quarter.

Ocwen Financial (NYSE:OCN): OCN was a 0.66% of the US long portfolio stake established in Q3 2014 at prices between $25 and $37. In Q4 2014, the position was reduced by ~15% at prices between $14.32 and $26.26. Q1 2015 saw an about-turn, as the stake was increased by ~30% at prices between $5.77 and $15.10. The pattern reversed in Q3 2015 - one-third reduction at prices between $6.67 and $11.76. The disposal this quarter was at prices between $2.11 and $7.36. The stock currently trades at $2.01.

Note: Baupost had a ~4% ownership in the business.

Sanchez Energy (NYSE:SN): This very small 0.16% of the portfolio stake was sold out during the quarter.

Stake Increases

Cheniere Energy: LNG is Klarman's second-largest 13F position at 14.58% of the US long portfolio. The original stake was established in Q1 2014 at prices between $41 and $55. In Q3 2014, it was increased by ~87% at prices between $70 and $84, and that was followed by another 23% increase the following quarter at prices between $62 and $80. Q2 2015 saw a further ~11% increase at prices between $68.49 and $80, and that was followed with another 48% increase last quarter at prices between $47.47 and $70.65. The last two quarters also saw a combined ~32% increase at prices between $24 and $54. The stock currently trades at $33.99. For investors attempting to follow Baupost, LNG is a good option to consider for further research.

Note 1: The size of this position, per the latest regulatory 13G filing, does not tally with the figure in the 13F report. That report shows Baupost owning 37M shares (15% of the business), compared to 29.84M shares in the 13F.

Note 2: Klarman also has a ~10% ownership interest in Liquefied Natural Gas Ltd. (OTCPK:LNGLY), a similar business as Cheniere Energy.

EMC Corporation: EMC is the largest 13F stake at 19.96% of the portfolio. It was established last quarter at prices between $24.16 and $28.35 and increased by ~77% this quarter at prices between $23.90 and $26.71. The stock currently trades at $27.38.

Note: On October 12, 2015, Dell announced a deal to acquire EMC for $24.05 per share cash and 0.111 per share in VMware tracking stock.

Theravance Biopharma (NASDAQ:TBPH): TBPH is a 1.76% of the US long portfolio position established in Q2 2014 as a result of the spin-off of TBPH from Theravance (now Innoviva (NASDAQ:INVA)). The spin-off terms called for Theravance shareholders to receive 1 share of TBPH for every 3.5 shares of Theravance held. The original stake was increased by ~5% in Q1 2015 at prices between $14.70 and $21.73. The stock currently trades at $17.56. TBPH has dropped ~24% since the May 2014 spin-off. This quarter saw a marginal stake increase.

Note: Klarman controls ~14% of the business.

Twenty First Century Fox (FOX, FOXA): FOX is a medium-sized 5.24% of the portfolio stake established in Q3 2015 at prices between $25.41 and $33.52 and increased by ~41% this quarter at prices between $24 and $28. The stock currently trades at $29.24.

Veritiv Corporation (NYSE:VRTV): VRTV is a 1.64% of the US long portfolio position established in Q3 2014 at prices between $32.50 and $50.22. Q2 2015 saw a ~9% increase at prices between $35.50 and $45.16, and that was followed by a ~13% increase in the following quarter at prices between $33.06 and $42.60. The stock currently trades at $37.10. This quarter saw a ~6% further increase.

Note: Klarman's ownership interest in VRTV is at ~19%.

American International Group (NYSE:AIG) WTS, Orexigen Therapeutics (NASDAQ:OREX), and Olin Corporation (NYSE:OLN): These small stakes (less than ~2.5% of the portfolio each) were increased substantially this quarter.

Note 1: Baupost has a ~15% ownership stake in OREX. Including the dilutions implied by a couple of capital raising transactions they were involved in, the ownership stake would be at over one-third of the business.

Note 2: The ownership stake in Olin Corporation is very significant at ~6.5%.

Stake Decreases

Bellatrix Exploration (NYSE:BXE): BXE is a very small 0.13% of the US long portfolio stake. It was established in Q4 2014 at prices between $2.99 and $6.15 and increased by ~21% the following quarter at around $2.50. This quarter saw a ~64% stake reduction at prices between $0.80 and $1.42. The stock currently trades at $1.

Note: Klarman controls 4.51% of the business.

NovaGold Resources Inc. (NYSEMKT:NG): NG is a 1.45% stake built up over several quarters in 2012 at prices between $3.5 and $12. Last quarter saw a ~13% reduction at prices between $3.27 and $4.47, and that was followed by a ~21% reduction this quarter at prices between $3.54 and $5.42. The stock currently trades at $6.13.

PayPal Holdings (NASDAQ:PYPL): The 3.94% PYPL position was established in Q3 2015 as a result of the spin-off of PayPal from eBay (NASDAQ:EBAY) that closed in July 2015. Klarman had 9.3M shares of eBay and received the same number of PayPal shares. He also increased the stake by ~17% after the transaction. PYPL started trading at $36.71 and currently trades at $39.48. This quarter saw a ~37% reduction at prices between $31.20 and $41.32.

PBF Energy (NYSE:PBF): PBF is a fairly large 5.10% of the US long portfolio position first purchased in Q3 2013 at prices between $21 and $26. It was more than doubled the following quarter at prices between $21.44 and $31.46, and was increased by over 175% in Q1 2014 at prices between $23.79 and $31.46. The stake has since been doubled by way of periodic buying. The stock currently trades at $28.33. This quarter saw a minor reduction.

Note: Klarman's ownership interest in PBF is ~10%.

Kept Steady

Antero Resources Corporation: AR is a large (top-five) 7.72% of the US long portfolio position established in Q3 2014 at prices between $54.50 and $65.71. The stake was increased by ~185% in the following quarter at prices between $38.60 and $55.51. Q1 2015 saw a further ~19% increase at prices between $34.02 and $42.35. The pattern reversed in Q2 2015: ~14% reduction at prices between $34 and $46. Q3 2015 saw a stake doubling at prices between $20.20 and $34.34, and that was followed by a ~19% increase last quarter at prices between $19 and $26. The stock currently trades at $25.50. Klarman controls 18.72% of the business.

Atara Biotherapeutics (NASDAQ:ATRA): ATRA is a 1.47% of the US long portfolio stake established in Q4 2014 at around $19 per share. In Q1 2015, the stake was increased by ~90% at prices between $18 and $42.90. The stock currently trades well below those ranges at $15.32.

Note: Klarman controls ~19% of the business.

ChipMOS (NASDAQ:IMOS): IMOS is a small 0.94% of the US long portfolio position established in Q2 2013 at prices between $12.30 and $20. The stake was increased by ~19% the following quarter at prices between $15 and $21. The last significant activity was in Q3 2015: ~14% increase at prices between $15.39 and $22. The stock currently trades at $17.16.

Note: Klarman controls 13.75% of ChipMOS.

Citigroup WTS (C.WS.A): The warrants have a strike price of $106.10 and expire on 01/04/2019. They currently trade at $0.92 (for ten warrants which can be converted to one Citigroup common stock, Yahoo Ticker C-WTA). The bulk of the 0.15% position was established at prices between $4.50 and $5.80. It is a leveraged bullish bet on Citigroup that would pay off handsomely if Citigroup common stock trades well above the strike price before expiry.

Forward Pharma (NASDAQ:FWP): FWP is a small 1.32% of the US long portfolio stake established in Q4 2014 at around $22. The stock currently trades at $18.20.

Note: Klarman controls ~12% of the business.

Innoviva Inc.(previously Theravance): INVA is a 3.60% of the US long portfolio stake. It is a very long-term position that has been in the portfolio since 2008. The stock currently trades at $10.70.

Note: Baupost controls ~19% of the business.

Keryx Biopharma (NASDAQ:KERX): KERX is a small 1.74% of the US long portfolio position established in Q1 2014 at prices between $12.16 and $17.04. In Q2 2014, the position was increased by two-thirds at prices between $12.11 and $17.04, and the pattern continued in the following quarter, with a ~74% stake increase at prices between $12.71 and $18.19. H1 2015 had also seen a ~40% further increase at prices between $9.32 and $14.68. The stock currently trades well below the low end of those ranges at $5.36. Klarman's cost basis is at around $12.

Note: In October 2015, KERX had a capital raise through a convertible debt transaction with Baupost for $125 million due 2020 and convertible at $3.74 per share. A Form 3 filed on 10/20/2015 indicates the beneficial ownership including this transaction at 42M shares (34.61% of the business).

Kindred Biosciences (NASDAQ:KIN): KIN is a very small 0.15% of the US long portfolio position. The stake as a percentage of the business is very significant at over 15%. It was established in Q4 2013 at a cost basis of around $11. The stock is now at $3.66.

KLX Inc. (NASDAQ:KLXI): KLXI is a small ~0.93% of the US long portfolio position established in Q1 2015 at prices between $37.34 and $41.65. The last quarter saw a one-third increase at prices between $30 and $41. The stock currently trades near the low end of those ranges at $31.36.

Note: KLXI is a spin-off from B/E Aerospace (NASDAQ:BEAV), and it started trading in December 2014.

NovaCopper (NYSEMKT:NCQ): This is a minute stake at 0.06% of the US long portfolio. Q2 2015 saw a ~76% increase at prices between $0.50 and $0.66, and the stock is now at $0.73.

Note: Klarman's ownership stake in NCQ is ~10% of the business.

Paratek Pharmaceuticals (NASDAQ:PRTK): PRTK is a small 0.34% of the US long portfolio stake established as a result of a cash infusion prior to the reverse stock split, merger, and name-change transaction of Paratek (privately held at the time) with Transcept Pharma (Nasdaq-listed at the time) in November 2014. The last significant activity was in Q2 2015, when there was an ~11% reduction at prices between $24.33 and $32.49. The stock currently trades at $13.02.

Note: Baupost Group controls 8.77% of the business.

SunEdison Semiconductor (NASDAQ:SEMI): SEMI is a 0.78% of the US long portfolio position established in Q2 2014 at prices between $14.37 and $17.76 and increased by ~90% in Q1 2015 at prices between $15.19 and $27.14. The stock currently trades below his purchase price ranges at $4.14. SEMI was spun off from SunEdison Inc. (OTCPK:SUNEQ) on May 22, 2014.

Note: Klarman's ownership interest in SunEdison Semiconductor is 19.95%.

ViaSat: VSAT is Klarman's third-largest US long position at 12.24% of the portfolio. Since Q3 2012, the stake has seen only minor increases. Klarman first purchased VSAT in 2008 at much lower prices, and his overall cost basis is in the high-teens. The stock currently trades at $75.39. He is sitting on huge gains on the position.

Biotie Therapies (NASDAQ:BITI) and Sunrun Inc. (NASDAQ:RUN): These very small (less than ~0.5% of the portfolio each) stakes were kept steady this quarter.

Note 1: An April regulatory 13D/A regulatory filing shows the entire BITI stake as disposed as a result of a merger-related tender offer from Acorda Therapeutics (NASDAQ:ACOR). Klarman's ownership before this transaction was ~17%.

Note 2: The 13F also lists small positions in Theravance and Chesapeake (NYSE:CHK) Notes.

The spreadsheet below highlights changes to Klarman's US stock holdings in Q1 2016:

Click to enlarge

Disclosure: I am/we are long AIG, INVA, KERX, LNG, NG, PYPL, TBPH.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.