Seth Klarman’s High Upside Potential Stock Picks: Oracle (ORCL) and More

Oracle Corporation (NASDAQ:ORCL) was another Klarman pick which analysts believe has high enough growth rates to justify the current valuation. Oracle carries trailing and forward P/E multiples of 16 and 11, respectively. In its most recent fiscal quarter- which ended in November, and was the second quarter of the company’s fiscal year- net income was up strongly from the same period in the previous fiscal year, though revenue only rose 3% and as a result we’re not sure how sustainable Oracle’s earnings growth will actually be. We can compare Oracle to Microsoft Corporation (NASDAQ:MSFT), which has a forward P/E of only 8 but has two important notes which reduce the importance of that figure. First, earnings will likely see a temporary bump as new versions of Windows and Office are released (of course, by the same token we’d somewhat discount recent declines in revenue and earnings as customers await the new versions of these products). Second, it is unclear that Windows 8 will meet expectations; certainly some customers will buy the new version whether they want to or not, but Microsoft’s stock price will still be sensitive to its reception. Both Oracle and Microsoft made our list of hedge funds’ favorite tech stocks. Microsoft is dependent enough on product reception that we’d avoid it for now, and we think that we’d need to wait on Oracle as well.

Klarman and his team sold some of their shares of News Corp (NASDAQ:NWSA) but it remained one of the five largest positions in Baupost’s portfolio. News Corp is currently planning to split into two separate businesses, which has gotten it a lot of attention in the markets. Breakups and spinout opportunities can sometimes result in creating substantial shareholder value, as management of the new companies can better focus on improving their core operations. Read more about spinouts. We think it’s watch list material, but News Corp looks too expensive in terms of its actual financial results to buy right now.