Seth Klarman’s book Margin of Safety sells at prices up to $1,500- that’s how much the investing community thinks it’s worth just to read his thoughts on investing that were published in 1991. Obviously his more recent stock picks, and what we can learn about his view on the markets from them, should be of interest as well and thanks to 13F filing requirements we can get those six to seven weeks after the end of every quarter for free. Here are some themes that we noticed when we analyzed the Baupost Group’s 13F for the end of September compared to previous filings.
Gold. Klarman and his team held their position in Allied Nevada Gold Corp. (AMEX:ANV) steady, and increased their stake in NovaGold Resources Inc. (AMEX:NG). These are smaller gold miners, with market capitalizations less than $5 billion compared to much larger companies such as Barrick Gold, and are principally located in North America. They’ve also turned in low net income recently, as Novagold is unprofitable on a trailing basis (and is expected to be in the red next year as well) while Allied Nevada trades at a high trailing P/E and at 17 times forward earnings estimates even with analysts expecting strong improvement at the company. We’re not sure why Baupost likes these companies even if it wants to buy stocks that benefit from high gold prices.
News Corp. Baupost trimmed its holdings of News Corp (NASDAQ:NWSA) but the large media company and owner of Fox properties continued to occupy a prime place in the fund’s portfolio. Despite certain legal problems at News Corp the company has been watched closely due to its plans to split into two. The breakup should create many of the same opportunities inherent in a spinout, an event that many value and special situations investors like to look at as an investment. Here's why hedge funds like to invest in spinouts. For the moment, News Corp carries a trailing P/E of 22, which is a bit high, and the details of any breakup would be difficult to model. We think that investors should become more familiar with spinouts for now and decide on whether or not to make a play when the company is closer to breaking up.
Dumping tech. Baupost’s position in Microsoft was cut to 1.4 million shares from 7 million three months earlier, the fund’s stake in Hewlett-Packard Company (NYSE:HPQ) was cut nearly in half, and it also sold over 2 million shares of Oracle Corporation (NASDAQ:ORCL) (though these latter two remained among its top ten positions by market value). Billionaire David Einhorn’s Greenlight Capital sold out of HP recently (see what stocks Einhorn has been buying instead). HP has been suffering recently as consumers move away from PCs and other hardware into tablets and even smartphones, which has left it unprofitable for now. The sell-side does insist that the company will recover- that it is trading at only 4 times next year’s earnings!- but we’re skeptical that the value opportunity is worth the risk. Microsoft’s another understandable sell as the company tries to move new versions of Windows and Office along with its Surface line of tablets- we actually think that it might be undervalued, but we can see why investors would avoid it. The interesting bit is to see Klarman also selling some shares of Oracle, whose business software and services focus helped it to an 11% earnings increase in its most recent quarterly report compared to the same period a year ago. It trades at 15 times trailing earnings with solid growth expectations going forward. We’re left to conclude that Baupost is likely sour on the technology sector as a whole.
Does this necessarily mean that investors should sell all their tech stocks? We don’t think so. Baupost’s bearishness on the sector should be just another tidbit of information used to make decisions. The same is true for its moves in News Corp and the small gold miners- we think that the miners should be avoided, with better values in the industry, and News Corp is best left on a watch list for now.