Seth Klarman's 5 Newest Stock Picks

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Includes: BP, GNW, HPQ, NWS, PDLI
by: Dividend Kings

Seth Klarman is a value investor that manages the Baupost Group Hedge Fund, which manages about $7 billion in assets. Mr. Klarman has a reputation for being careful about managing risk and has been known to keep nearly fifty percent of his portfolio in cash. Since the Baupost Group was founded in 1983, its average annual return has been nearly 20%. In this article, I analyze the stocks that I think investors should consider among his recent picks based on his 13F.

Hewlett Packard Company (NYSE:HPQ) Hewlett Packard has a market cap of $50.58 billion with a price to earnings ratio of 7.66. The stock has traded in a 52 week range between $21.50 and $26.08. The stock is currently trading around $25. The company reported third quarter revenues of $32 billion compared to revenues of $33 billion in the third quarter of 2010. Third quarter net income was $239 million compared to net income of $2.5 billion in the third quarter of 2010.

The Baupost Group owns 20,750,000 shares of Hewlett Packard. The Baupost Group purchased all 20,750,000 shares of Baupost in the third quarter of 2011. Hewlett Packard manufactures and sells PCs and other computer hardware such as printers and scanners. The company also provides IT consulting and internet security services.

The company’s year-over-year third quarter revenues were down by $1 billion and its net income decreased by $2.26 billion. Hewlett Packard’s decrease in earnings was because revenues from the sale of PC’s and its other computer hardware devices has fallen. Part of the problem can be blamed on a shortage of hard drives as a result of flooding in Taiwan. However, the recent slowdown in demand from emerging market countries, such as China and India, is alarming.

Investors have been put off by Hewlett Packard’s recent decline in earnings, and as a result, the stock price is 49% off of its 52 week high, and down by 38% over the last 52 weeks. Meg Whitman, Hewlett Packard’s new chief has decided that Hewlett Packard will keep its personal computing business. She also announced that the company will strive to use its webOS operating system in the development of its cloud computing products. The company will also focus on increasing its service business. It is too early to know how Hewlett Packard’s new business directives will work out, so for now, I would take a wait and see approach to this stock.

BP Plc (NYSE:BP) BP has a market cap of $127.94 billion with a price to earnings ratio of $5.6. The stock has traded in a 52 week range between $33.62 and $49.50. The stock is currently trading around $40. The company reported third quarter revenues of $97 billion compared to revenues of $74 billion in the third quarter of 2010. Third quarter net income was $4.9 billion compared to net income of $1.7 billion in the third quarter of 2010.

The Baupost Group owns 13,740,950 shares of BP. The Baupost Group purchased 5,500,000 in the second quarter of 2011 and an additional 8,240,950 shares in the third quarter of 2011. BP is one of the largest integrated oil companies in the world. In the third quarter, BP increased its year-over-year revenues by 30% and its net income by 188%. In 2010, BP’s earnings were down because of the Deepwater Horizon oil spill disaster. BP’s 2010 net income was $-3.7 billion. The company has turned things around and has reported net income of $17.6 billion through the first three quarters of 2011.

In another move, that shows that BP is moving forward, it reinstated its dividend (which was suspended in 2010) in the first quarter of 2011. The dividend is now $1.68 per share. In the past week, BP which is the largest leaseholder and oil producer in the Gulf of Mexico purchased an additional 11 leases. While BP has made significant progress towards getting its business back to normal, it still faces enormous legal challenges as a result of the oil spill. The company must also fund a $20 billion disaster victim trust fund.

No one can be sure how BP’s legal problems will turn out, but the company has done an excellent job of returning to profitability. It should also be mentioned that the stock (price to earnings ratio 5.6/price to book ratio 1.1) is much cheaper than its competitors. Bargain hunting investors should take a look at BP.

News Corporation (NASDAQ:NWS) News Corporation has a market cap of $43.68 billion with a price to earnings ratio of 17.01. The stock has traded in a 52 week range between $13.83 and $19.08. The stock is currently trading around $17. The company reported first quarter revenues for the period ending on September 30th, in the amount of $8 billion compared to revenues of $7.4 billion in the first quarter of 2010. First quarter net income was $738 million compared to net income of $775 million in the first quarter of 2010.

One of News Corporation’s competitors is Viacom Inc. (NYSE:VIA). Viacom is currently trading around $46 with a market cap of $25.47 billion and a price to earnings ratio of 12.73. Viacom pays a dividend which yields 2.7% versus News Corporation whose dividend yields 1.1%.

The Baupost Group owns 4,283,175 shares of News Corporation. The Baupost Group purchased all 4,283,175 shares of News Corporation in the third quarter of 2011. News Corporation primarily operates as a news media company. In recent months, News Corporation has had a couple of hurdles to overcome. It seems that News Corporation has been able to get past its mid-2011, News of the World phone hacking scandal. News Corporation has also decided to sale its money losing “MySpace” business. The company will also benefit in 2012 from the local and national U.S. elections. With the 2012 elections approaching the company's television ratings will increase, and it will receive a big boost in revenues from political advertisements. News Corporation's stock performance has been decent, and the stock is up by 6.9% over the last 52 weeks and 95% over the last three years. With News Corporation's phone hacking scandal behind it, and with the catalyst of the 2012 elections just ahead, I think that News Corporation's stock price could move up.

Genworth Financial Inc. (NYSE:GNW) Genworth has a market cap of $2.82 billion with a negative price to earnings ratio. The stock has been trading in a 52 week range between $4.80 and $14.77. The stock is currently trading around $6. The company reported third quarter revenues of $2.5 billion compared to revenues of $2.6 billion in the third quarter of 2010. Third quarter net income was $29 million compared to net income of $83 million in the third quarter of 2010.

The Baupost Group owns 10,000,000 shares of Genworth. The Baupost Group purchased all 10,000,000 shares of Genworth in the third quarter of 2011. Genworth provides insurance and wealth management services. In the third quarter, the company’s year-over-year revenues were down by 4% and its net income was down by 186%. Seth Klarman bought Genworth with the expectation that the company would be able to turn itself around. The company made a good start by reducing its mortgage insurance losses by 50%.

However, the company reported third quarter earnings on November 4th and since that time the stock price has dropped by 25%. The company’s return on equity -0.03, revenue growth -5.5% and profit margin -1.41 were all negative. The stock price is down by 55.8% over the last 52 weeks, and as a result, the stock price is dirt cheap (price to book ratio 0.17). Genworth might be a suitable investment for those with a long term investment horizon, but I cannot see the company turning its business around in the near future.

PDL BioPharma Inc. (NASDAQ:PDLI) PDL BioPharma has a market cap of $832 million with a price to earnings ratio of 7.84. The stock has traded in a 52 week range between $4.66 and $6.70. The stock is currently trading around $6. The company reported third quarter revenues of $83.7 million compared to revenues of $86.4 million in the third quarter of 2010. Third quarter net income was $45.9 million compared to net income of $40 million in the third quarter of 2010.

The Baupost Group owns 16,868,900 shares of PDL BioPharma. The Baupost Group purchased 6,373,675 shares of PDL BioPharma in the third quarter of 2011. PDL BioPharma is engaged in the management of its antibody humanization patents. In the third quarter, the company’s year-over-year revenues decreased by 3% but its net income increased by 11%. The company generates revenues through the royalties that it receives from business partners like Genentech and Novartis (NYSE:NVS) which produce and market drugs based on its proprietary patents.

On December 19th, the company announced that its fourth quarter revenues would be 5% lower than its 2010 fourth quarter revenues. The company’s stock performance has been poor, and the stock is down by 9.5% over the last 52 weeks. The biggest reason that investors are attracted to BioPharma is its dividend income. The company has made irregular dividend payments since 2008, and its current dividend is $0.60 with a yield of 10%. The company has around $195 million in cash, and the dividend seems to be safe for now, but I prefer stocks with a longer dividend history. Perhaps Seth Klarman is privy to information that is not available to the general public, but I do not see much of an upside for this stock. I would advise prospective investors to do additional research regarding this stock.



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