Tracking Seth Klarman's Baupost Group Holdings - Q1 2018 Update

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Includes: ABC, AGN, AMC, AR, ATRA, CAH, CLNY, ESRX, FOX, FWP, GTYH, IMOS, KERX, LNG, MCK, NG, OREXQ, PBF, PCG, PRTK, PXD, QRVO, RUN, SCAC, STNL, SYF, TBPH, TMQ, TWX, VRTV, VSAT
by: John Vincent
Summary

Seth Klarman’s 13F portfolio value increased from $10.11B to $10.37B this quarter.

Baupost Group doubled its stake in Pioneer Natural Resources during the quarter.

The portfolio continues to be heavily concentrated, with the top three positions accounting for one-third of the 13F portfolio.

This article is part of a series that provide an ongoing analysis of the changes made to Baupost Group's 13F stock portfolio on a quarterly basis. It is based on Klarman’s regulatory 13F Form filed on 05/14/2018. 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 2017.

Baupost Group’s 13F portfolio value increased ~3% from $10.11B to $10.37B this quarter. The total number of 13F securities decreased from 32 to 31. The portfolio is heavily concentrated, with Twenty-First Century Fox, Cheniere Energy, Synchrony Financial, ViaSat Inc., and Allergan plc together accounting for ~50% of the 13F holdings.

Since inception (1982), Baupost Group’s 13F portfolio has accounted for between 2.4% to 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:

PG&E Corporation (NYSE:PCG) and Tesla Notes: These are the two new positions this quarter. PCG is a small 1.33% stake established at prices between $38 and $45 and the stock currently trades for $43.23. The 13F report also lists a very small 0.50% position in Tesla Notes.

Note: PG&E shares dropped sharply in December as they halted the dividend, citing liability concerns from the October 2017 Northern California wildfires. Following that, several hedge funds (Abrams, Tepper, Loeb, Romick, etc.) added PG&E shares to their portfolios.

Stake Disposals:

Express Scripts (NASDAQ:ESRX): ESRX was a 1.70% of the portfolio position established in Q1 2017 at prices between $64 and $73 and doubled the following quarter at prices between $59 and $67. There was a ~10% trimming last quarter and the stake was sold out this quarter at prices between $70 and $82. The stock currently trades at $73.67.

Note: In March, Cigna (NYSE:CI) agreed to buy Express Scripts in a cash-and-stock transaction ($48.75 in cash and 0.2434 shares of the combined business for each share held).

Cascadian Therapeutics (NYSE:CASC) & Sunrun Inc. (NASDAQ:RUN): The original very small CASC stake was doubled in Q1 2017 at prices between $3.50 and $5.10. In January, Seattle Genetics (NASDAQ:SGEN) agreed to acquire Cascadian Therapeutics for $10 per share cash. The transaction closed in March, thus eliminating the position. Sunrun was a minutely small 0.17% stake disposed this quarter.

Stake Increases:

Twenty-First Century Fox (NASDAQ:FOX) (NASDAQ:FOXA): FOX is currently the largest position at 13.42% of the portfolio. It was established in Q3 2015 at prices between $25.41 and $33.52 and increased by ~40% in Q1 2016 at prices between $24 and $28. H2 2016 also saw a two-thirds increase at prices between $24 and $29. Last two quarters saw another ~43% increase at prices between $24.30 and $38.50. The stock currently trades at $37.29.

Note: In December 2017, Walt Disney (NYSE:DIS) agreed to acquire certain assets (excludes Broadcasting network and stations, Fox News, Fox Business, FS1, FS2 and Big Ten Network) from Twenty-First Century Fox in an all-stock deal (0.2745 shares of DIS per FOX share).

ViaSat (NASDAQ:VSAT): VSAT is a large (top five) position at 8.66% of the portfolio. The stake has only seen minor increases since Q3 2012. 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 $63.01. Q4 2016 saw a ~14% increase at prices between $66 and $81. He is sitting on huge gains on the position. There was a ~4% increase this quarter.

Note: Klarman controls ~23% of VSAT.

Allergan plc (NYSE:AGN): AGN is a large (top five) 7.71% of the US long portfolio stake established in Q1 2016 at prices between $266 and $299. Q2 2016 saw a ~16% increase at prices between $202 and $278. There was another ~70% increase in Q4 2016 at prices between $189 and $243. The pattern reversed in Q1 2017: almost 30% sold at prices between $210 and $250. The stock currently trades at $154. Q3 2017 saw a ~22% stake increase at prices between $202 and $256 and that was followed with a ~50% increase last quarter at prices between $164 and $211. For investors attempting to follow Baupost, AGN is a very good option to consider for further research. This quarter saw a ~6% increase.

Pioneer Natural Resources (NYSE:PXD): PXD was a minutely small stake established in Q3 2017. The position was built up to a 3.42% portfolio stake last quarter at prices between $142 and $174. There was a stake doubling this quarter at prices between $165 and $189. The stock is now well above those ranges at $202.

Antero Resources Corporation (NYSE:AR): AR is a fairly large ~5% of the portfolio position established in Q3 2014 at prices between $54.50 and $66. The stake was increased by ~185% the following quarter at prices between $38.50 and $55.50. Recent activity follow: Q2 2016 saw a one-third reduction at prices between $24.50 and $30, while Q2 2017 saw a ~45% increase at prices between $19.50 and $22.50. The stock currently trades at $18.93. Last three quarters have seen a combined ~25% stake increase at prices between $17 and $22.

Note: Klarman controls ~8% of the business.

Colony NorthStar (CLNS): The 2.69% stake in Colony NorthStar came about as a result of the three-way merger of Colony Capital (NYSE:CLNY), NorthStar Asset Management Group (NSAM), and NorthStar Realty Finance (NRF) that closed in January last year. Baupost held stakes in all three of these stocks and those got converted into CLNS shares. They control ~9% of CLNS and their overall cost-basis is ~$12.50 per share. CLNS currently trades well below that at $6.05. For investors attempting to follow Baupost, CLNS is a good option to consider for further research. There was a ~4% stake increase this quarter.

Note: The merger terms called for conversion to CLNS in the ratio 1:1.0996:1.4663 (NSAM:CLNY:NRF).

Atara Biotherapeutics (NASDAQ:ATRA): ATRA is a 2.35% of the 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 at $44.30. There was a ~17% stake increase this quarter at prices between $18 and $48.

Note: Klarman controls ~15% of the business.

McKesson Corp. (NYSE:MCK): MCK is a ~2% portfolio stake established in Q3 2017 at prices between $146 and $168 and increased by ~170% last quarter at prices between $135 and $163. The stock is currently at $151. For investors attempting to follow Baupost, MCK is a good option to consider for further research. There was a ~19% stake increase this quarter at prices between $139 and $177.

Note: MCK had a previous round-trip. It was a 1.75% portfolio stake established in Q4 2016 at prices between $124 and $167 and sold out in Q2 2017 at prices between $135 and $168.

Veritiv Corporation (NYSE:VRTV): VRTV is a 1.45% of the 13F portfolio position established in Q3 2014 at prices between $32.50 and $50.50. Last quarter saw a ~20% stake increase at prices between $22.50 and $32.50. The stock currently trades at $30.25. For investors attempting to follow Baupost, VRTV is a good option to consider for further research. There was a ~5% stake increase this quarter.

Note: Klarman’s ownership interest in VRTV is ~25%.

NovaGold Resources Inc. (NYSEMKT:NG): The very small 0.56% long-term stake in NG saw a ~13% increase last quarter at prices between $3.40 and $4.25 and another ~25% increase this quarter at prices between $3.60 and $4.70. The stock is currently at $4.92.

Stake Decreases:

PBF Energy (NYSE:PBF): PBF is a 2.59% of the 13F portfolio position first purchased in Q3 2013 at prices between $21 and $26. It was more than doubled the following quarter at prices between $21.50 and $31.50 and was increased by over 175% in Q1 2014 at prices between $24 and $31.50. The stake had since been doubled through periodic buying. Q3 2016 saw another ~50% increase at prices between $21 and $24. There was an about-turn last quarter: ~30% reduction at prices between $26 and $36 and that was followed with a similar selling this quarter at prices between $29 and $36. The stock currently trades at $42.02.

Note: Klarman’s ownership interest in PBF is ~7%.

AmerisourceBergen (NYSE:ABC): ABC was a minutely small position established in Q3 2017. It was built to a 1.30% position last quarter at prices between $73 and $94 and the stock currently goes for $87.28. There was an ~8% trimming this quarter.

ChipMOS (NASDAQ:IMOS) and Forward Pharma (NASDAQ:FWP): These two minutely small (less than 0.5% of the portfolio each) stakes saw further reductions this quarter.

Note: Following settlement of a lawsuit with Biogen (NASDAQ:BIIB) that netted $1.25B, FWP shareholders received $23.13 per share as a special dividend last year. The stock is now at $2.25.

Kept Steady:

Cheniere Energy (NYSEMKT:LNG): LNG is Klarman’s second-largest 13F position at ~11% of the portfolio. The original stake was established in Q1 2014 at prices between $41 and $55. In H2 2014, it was doubled at prices between $62 and $84. The three quarters through Q1 2016 saw another stake doubling at prices between $24 and $71. Q4 2016 saw a reversal: 22% sold at prices between $35.50 and $43.50. The stock currently trades at $62.71.

Note: Baupost controls ~9% of Cheniere Energy.

Synchrony Financial (NYSE:SYF): SYF, the November 2015 spinoff from General Electric (NYSE:GE), is now the third-largest position at 9.47% of the portfolio. It was established in Q3 2016 at prices between $25 and $28.50. Q2 2017 saw a two-thirds increase at prices between $26.50 and $34.50. The stock currently trades at $33.94.

Qorvo Inc. (NASDAQ:QRVO): QRVO is a large 7.47% portfolio stake established in Q1 2017 at prices between $53 and $69 and increased by ~25% the following quarter at prices between $63 and $79. There was another ~22% stake increase last quarter at prices between $65 and $81. The stock is now at $81.67.

Note: Baupost controls ~9% of the business.

Time Warner Inc. (NYSE:TWX) and Sentinel Energy Services (NASDAQ:STNL): These two positions were established last quarter. TWX is a large merger arbitrage stake: in October 2016, AT&T (NYSE:T) agreed to acquire Time Warner in a cash-and-stock deal valued at $107.50 per share (half cash). The Justice Department sued to block the deal last November. The stock is now at $94.38. STNL is a SPAC established by former executives of Schlumberger (NYSE:SLB) to acquire an underperforming energy services business.

Cardinal Health (NYSE:CAH): The ~3% CAH position was purchased in Q4 2016 at prices between $65 and $78 and almost doubled in Q2 2017 at prices between $71.50 and $83. There was another ~25% increase the following quarter at prices between $64 and $79 and that was followed with a stake doubling last quarter at prices between $55 and $68. The stock currently trades near the low end of those ranges at $55.16. For investors attempting to follow Baupost, CAH is a good option to consider for further research.

Theravance Biopharmaceuticals (NASDAQ:TBPH): TBPH is a ~2% of the portfolio position established in Q2 2014 as a result of the spinoff of TBPH from Theravance (now Innoviva). The spinoff 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 $14.50 and $22. Q2 2016 saw another ~13% increase at prices between $17.50 and $24. The stock is now at $25.52. Q4 2016 also saw a ~25% increase at prices between $24.50 and $38.50.

Note: Klarman controls ~19% of the business.

Keryx Biopharma (NASDAQ:KERX): KERX is a ~1% of the portfolio position established in Q1 2014 at prices between $12 and $17. Q2 and Q3 2014 saw the position more than double at prices between $12.50 and $18. H1 2015 had also seen a ~40% further increase at prices between $9.50 and $14.50. The stock currently trades well below the low-end of those ranges at $5.68. Klarman’s cost-basis is at around $12.

Note 1: Regulatory filings show Baupost beneficially owning 61.37M shares (39.66% of business). This is compared to 25.79M shares in the 13F. The difference is due to ~$165M in 2021 convertible ($3.74) notes that they also own.

Note 2: Regulatory filings also show a convertible notes exchange transaction executed in April - 33.42M shares ($125M, 10/15/2020 expiry convertible at $3.74) PLUS $10M cash exchanged for 35.58M shares ($164.75M, 10/15/2021 expiry convertible at $4.63).

AMC Entertainment (NYSE:AMC): AMC is a very small 0.68% of the portfolio position purchased in Q3 2017 at prices between $12.50 and $23.20 and increased by ~40% last quarter at prices between $11 and $16. The stock is now at $16.40

Note: Baupost has a ~9% ownership stake in the business.

Paratek Pharmaceuticals (NASDAQ:PRTK): PRTK is a minutely small 0.30% position that saw a ~17% increase in Q2 2017 at prices between $18.50 and $25.50. The stock is now at $11.50.

Note: Baupost Group controls ~9% of Paratek Pharmaceuticals.

GTY Technology (NASDAQ:GTYH), Saban Capital Acquisition Corp. (NASDAQ:SCAC), Trilogy Metals (NYSEMKT:TMQ), and Orexigen Therapeutics (OTCPK:OREXQ): These are very small (less than ~0.5% of the portfolio each) stakes kept steady this quarter.

Note 1: Baupost controls ~9% Saban Capital Acquisition, ~8% of GTY Technology, and ~10% of Trilogy Metals.

Note 2: Regulatory filings show Baupost owning 9.99M shares (37.5% of business) of Orexigen. This is compared to 2.22M shares in the 13F. Following Chapter 11 bankruptcy in March, they were involved in a $35M DIP (debtor-in-possession) loan facility related transaction. Previously, they were involved in other capital raise transactions.

Note 3: The 13F also lists a small position in Theravance Biopharma Notes.

The spreadsheet below highlights changes to Klarman's US stock holdings in Q1 2018:

Seth Klarman - Baupost Group - Q1 2018 13F Report

Disclosure: I am/we are long LNG, AGN, PRTK, KERX, TBPH, NG, AR, CLNS. 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 microcap stocks. Please be aware of the risks associated with these stocks.