Q1 2012 Seth Klarman's Baupost $3B Filing: Analysis Of Top 3 High Conviction Buys And 5 Sells

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 |  Includes: ALR, CBIO, GNW, IDIX, MSFT, NG, NWSA, PDLI
by: GuruFundPicks

Boston-based Hedge Fund Baupost Group LLC, headed by star Manager Seth Klarman, manages $23 billion using a value investing philosophy, including $2.96 billion in U.S.-traded equities per its latest March 2012 quarter filing with the SEC on Friday. He has generated over 20% compound annual returns for his investors, and was ranked fifth in an article by the Financial Times in generating the most net gains at $12.5 billion for his investors since fund inception. In the crisis of 2008/09, while most hedge funds lost assets, Baupost managed to double its assets by focusing on corporate bonds. Seth Klarman's investment methodology is detailed in his book "Margin of Safety" that sells on Amazon for $2,400.

The fund holds a concentrated portfolio of 20 positions, with 60% of its holdings in large-caps, and most of the remaining 40% in small-caps, and with its small-cap holdings being mostly in the biotech and natural resources groups. We analyzed Baupost's holdings in its Q1 2012 13-F to determine its highest conviction bets, selecting the largest buys and sells in size, where the buy/sell is also a significant proportion of its prior quarter position in that company. Based on that analysis, the following are its top three high conviction bullish moves (see Table):

News Corp. (NASDAQ:NWSA): NWSA is an international diversified media and entertainment holding company, engaged in newspaper, magazine and book publishing, TV broadcasting, and film production and distribution. Baupost added a new $530 million in Q1, its largest buy by far. Other leading institutions with large bullish bets on NWSA in Q1 include New York-based mega fund Bank of New York Mellon Corp. adding 5.7 million shares to its 26.5 million shares prior quarter position, and Boston-based mega fund MFS Investment Management adding 2.9 million shares to its 3.9 million shares prior quarter position.

NWSA reported its Q3 (March) on Wednesday, after the market-close, in which it beat analyst revenue and earnings estimates (37c v/s 31c), buoyed by strong performance at its filmed entertainment segment and a lower tax rate. The company also announced that it was boosting its stock buyback program from $5 billion to $10 billion. Its shares as a result gapped up the following morning to new multi-year high territory, now trading at 12 forward P/E and 1.8 P/B compared to averages of 11.3 and 1.1 for its peers in the newspaper publishing group. The stock is being held down mostly due to the ongoing news headlines about its phone hacking investigation in the U.K., and also concerns about weakness in its European market.

Idenix Pharmaceuticals (NASDAQ:IDIX): IDIX engages in the discovery and development of drugs for the treatment of human viral and other infectious diseases, including a focus on hepatitis C virus, hepatitis B virus (HBV), human immunodeficiency virus (HIV) type-1, and acquired immune deficiency syndrome (AIDS). Baupost added $22 million in Q1 to its $49 million prior quarter position in the company, making it the second largest institutional holder after Brookside Capital Management that owns $82 million worth of IDIX. Other leading institutions with large bullish bets on IDIX in Q1 include mega fund State Street Corp. adding 1.0 million shares to its 1.5 million shares prior quarter position, and D.E. Shaw adding 1.6 million shares to its 0.4 million share prior quarter position.

IDIX shares, along with those of its peers in the hepatitis C space, have been very volatile this year. The rally in January in IDIX shares was triggered mostly by the January 9th announcement of the acquisition of rival Inhibitex by Bristol-Myers Squibb Co. (NYSE:BMY), that ignited a rally in the entire hepatitis C group of stocks, as well as also by positive interim phase 2b clinical trial data on its HCV Nucleotide Inhibitor, IDIX 184, that was released the same day by the company. The collapse in the share price from the January rally has in part been triggered by profit-taking, and also in part by an early-April announcement by Abbott Laboratories (NYSE:ABT) of positive results from its hepatitis C trials that sent most rival hepatitis C drug developers down.

IDIX also continues to be talked about as a takeover target for Merck & Co. (NYSE:MRK), and there are a number of other potential positive developments, including a possible licensing deal with Gilead Sciences that could end the patent fight over certain nucleoside compounds useful in treating patients with hepatitis C virus infection, that could easily send shares back up into double-digit territory. The stock was recently upgraded to Market Perform by JMP Securities, and of the 12 analysts that cover it, five rate it buy/strong buy, four at hold, and the remaining three at underperform/sell, with a price target of over $12, well above current prices in the $8-$9 range.

Novagold Resources Inc. (NYSEMKT:NG): NG is a Canadian company engaged in the exploration and development of gold, silver and copper in Alaska and British Columbia. Baupost added $14 million in Q1 to its $40 million prior quarter position in the company. Other leading institutions with large bullish bets on NG in Q1 include gold-focused Tocqueville Asset Management, with $8.8 billion in 13-F assets, adding 4.3 million shares in to its 0.9 million share prior quarter position, and Russell Frank Co. adding a new 1.0 million share position. NG shares have been in a persistent downtrend since late January, now off over 50% from the January highs. The stock currently generates losses, and trades at 2.6 P/B compared to the average of 2.3 for its peers in the gold mining group.

The following are Baupost's high conviction bearish picks, based on its Q1 selling activity (see Table):

  • Microsoft Corp. (NASDAQ:MSFT), that is the world's leading software company, developing operating systems, business software and other applications for servers, PCs and intelligent devices, in which it cut $157 million in Q1 from its $376 million prior quarter position;
  • Genworth Financial Inc. (NYSE:GNW), a leading U.S.-based international insurance company offering life and long-term care insurance, annuities, asset management services and mortgage insurance worldwide, in which it cut out completely in Q1 its $58 million prior quarter position;
  • PDL Biopharma Inc. (NASDAQ:PDLI), that develops treatments for cancer and immune disorders based on proprietary antibody humanization technology, in which it cut out completely in Q1 its $52 million prior quarter position;
  • Alere Inc. (NYSE:ALR), that is a developer of patient diagnostic, monitoring and health management products and services focused in the areas of infectious disease, cardiology, oncology, toxicology, and women's health, in which it cut $36 million in Q1 from its $39 million prior quarter position; and
  • Targacept Inc. (TRGT), that is a development-stage biotech that discovers and develops NNR Therapeutics, a new class of drugs for the treatment of CNS diseases and disorders, in which it cut out completely in Q1 its $28 million prior quarter position.

Table

Credit: Fundamental data in this article and company descriptions are based on SEC filings, Zacks Investment Research, Yahoo, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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