Seth Klarman's Baupost Group's Position Increases During Q2 2012

Includes: ANV, BP, HPQ, IDIX, NG
by: Zvi Bar

Seth Klarman is a well known value investor that founded the Baupost Group in 1982. Baupost's assets were $30 million in 1982 and grew to $29.4 billion in 2012, making Baupost one of the most successful hedge funds. Baupost and Klarman are known for emphasizing risk management, including refraining from high usage of leverage or emotion when investing, and often maintaining significant cash holdings. According to Baupost's latest 13F-HR, Seth Klarman's fund increased its positions in several of Baupost's already existing investments during the second quarter. Below is a summary and analysis of those position increases.

During the second quarter, Baupost added to what was an already substantial investment in BP PLC (NYSE:BP). The position in the large energy company increased by about 40 percent during the second quarter, from 9,390,900 to 13,455,900 shares. Klarman initiated Baupost's investment in BP during the second quarter of 2011, but had trimmed about 20 percent of its position in BP during the first quarter of 2012. BP had appreciated during Q1, when Baupost sold those shares, and later declined, though not substantially. Nonetheless, it would appear that Baupost likely sold some BP near its 2012 highs and then accumulated far more shares when equities, and especially those with exposure to oil and gas prices, declined during the second quarter. See a recent performance chart for BP, below:

Baupost also substantially increased its holdings in the technology large-cap, Hewlett Packard Co. (NYSE:HPQ). Bauposts's position in HPQ increased by over 50 percent, from 17,250,000 to 26,850,601 shares. Both BP and HPQ now each represent about 15 percent of Baupost's U.S. equity holdings. The hedge fund first established a position in HPQ during the fourth quarter of 2011, and trimmed the position last quarter, similarly to what Baupost did with HPQ, following an exceptionally strong 2012 start for equities generally. Baupost would have had to re-enter HPQ during the second quarter at prices between about $19 and $25. Since the tech giant now trades at below $20, it is likely that anyone wishing to emulate Baupost's investments could now acquire positions at a position near or superior to Klarman's recent HPQ acquisitions. See a recent performance chart for HPQ, below:

Baupost also increased its position in Idenix Pharmaceuticals (NASDAQ:IDIX) by approximately 20 percent, from 8,249,000 to 10 million shares. Though IDIX represents less than three percent of Baupost's U.S. equity holdings, it is a position that Klarman has been accumulating for several quarters. During Q2 2012, shares of IDIX traded between about $7.40 and $10.80, with the company now trading at about $8 per share, or near the low end of its recent range. Shares of IDIX sustained a considerable drop at the end of July and start of August when the company issued a secondary stock offering, shortly after receiving a fast track designation for its proposed Hepatitis C drug. See a recent performance chart for IDIX, below:

Baupost also increased its holdings in Allied Nevada Gold (NYSEMKT:ANV). Though still representing less that four percent of Baupost's U.S. equity holdings, Klarman increased the hedge fund's investment in the gold miner by about 25 percent during the second quarter of 2012, from 4,012,750 to 5,053,550 shares. Baupost started to acquire shares in ANV during the first quarter of 2011. The company has been fairly range bound since Baupost began to accumulate shares of ANV, with the miner currently slightly below its median price during Baupost's term as an investor, and at about its median price during the second quarter of 2012. See a recent performance chart for ANV, below:

Baupost Group also increased its position in Novagold Resources (NYSEMKT:NG), and substantially so. Baupost began to accumulate a position in NG during the third quarter of 2011, and has added shares during every quarter since then. Klarman increased its stake in NG by 60 percent, from 10 million to 16 million shares during the second quarter of 2012, which works out to over five percent of the small-cap prospective gold miner. NovaGold now trades at about $4.30, which is considerably below the price Baupost would have paid for any of its shares. See a recent performance chart for NG, below:

NovaGold sustained a considerable decline in late July, after Barrick Gold (NYSE:ABX), noted it would not make a construction decision regarding the Donlin Gold project in the near future. Barrick and NG are 50/50 partners in the Donlin project, which was already known to be several years from constriction/production, with current estimates expecting it to take about four years for the project to obtain all the necessary permits. Though shares are up about 15 percent since bottoming out about a week and a half ago, shares are still down about 50 percent since the start of the year and 25 percent over the last month. Given NG's substantial recent declines, it appears likely that Baupost will acquire more shares of NG during Q3.

Baupost's increased positions in these companies indicate that Seth Klarman continues to believe that natural resource investments such as BP, ANV and NG are sensible long-term investments. Similarly, Baupost added an investment in Hess (NYSE:HES) during the second quarter. Additionally, Baupost added a sizable investment in Oracle (NASDAQ:ORCL), which might be seen as a similar investment to its large and growing position in HPQ. Generally speaking, it appears Baupost is seeking out a combination of undervalued resource investments and large-cap tech investments.

Disclosure: I am long NG.