Value Investor Seth Klarman’s Cheap Stock Picks Include BP

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By using data from hedge funds’ 13F filings, we have found that on average the most popular small cap stocks among hedge funds beat the market by 18 percentage points per year. Learn more about our small cap strategy. It’s also possible to think of each individual 13F as a list of recommendations from that manager which an investor can refine, doing more research on companies which seem like they have good prospects. Seth Klarman of the Baupost Group is a well-known value investor; copies of his investing book Margin of Safety have sold for up to $1,400. Here are four stocks which Baupost reported owning on its 13F (see the full list of Klarman’s stock picks) and which currently have both trailing and forward price-to-earnings multiples of 18 or lower:

Baupost owned almost 11 million shares of BP plc (NYSE:BP), making it the fund’s largest holding by market value. Oil majors are generally trading at earnings multiples of around 10, and BP is no exception; in fact, its forward P/E is only 8, and we think that is at least in part because its brand remains tarnished by the Deepwater Horizon disaster. We think that BP- which has been very active in selling off assets- has at least some value prospects (and a quite high dividend yield) though with other oil majors being cheap it might be better to look at Exxon Mobil Corporation (NYSE:XOM) and other peers. The Bill and Melinda Gates Foundation Trust is another major shareholder of BP (check out more stocks the trust is invested in).

BAUPOST GROUPOracle Corporation (NASDAQ:ORCL) was another of Klarman’s largest positions; however, he did cut his stake in the enterprise software company by 23%. Oracle also qualifies for value status as its trailing and forward earnings multiples are 16 and 12, respectively. The company’s most recent fiscal quarter ended in November with net income growing 18% from its levels in the same period in the previous fiscal year (though revenue growth was much lower). While we’d prefer to see the company prospering on the top line as well, the combination of growth and earnings multiples in the teens makes it worth further research in our view. Oracle made our list of the most popular tech stocks among hedge funds for the fourth quarter of 2012 (find more tech stocks hedge funds love).

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