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Value Investor Seth Klarman Bought BP plc (ADR) (BP) and American International Group Inc (AIG), Sold News Corp (NWSA) During Q1

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Seth Klarman, who manages the Baupost Group, is such a widely followed value investor that his book Margin of Safety, which was written in 1991 and details his thoughts on investing, has sold for $1,500. Baupost and hundreds of other hedge funds file 13Fs each quarter with the SEC, disclosing many of their long equity positions as of the beginning of the previous quarter. We track these filings and use them to develop investing strategies; we have found, for example, that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year. We also like to review filings from top managers such as Klarman and compare them to their older filings to see what they have been buying or selling. Here are some trends we noticed when comparing Baupost’s holdings as of the end of March to previous filings:

Hated companies. Because of their Gulf of Mexico disaster and government bailout, respectively, BP plc (ADR) (NYSE:BP) and American International Group Inc (NYSE:AIG) are characterized by pretty poor investor sentiment. Klarman and his team were buying both stocks during Q1, and they are now both among the fund’s three largest holdings by market value. There’s a value case to be made for either of these two companies: BP plc (ADR) (NYSE:BP) trades at 8 times forward earnings estimates (though this isn’t particularly out of the ordinary for an oil major in the current environment, as can be seen from looking at the company’s peers) while American International Group Inc (NYSE:AIG)’s price-to-book ratio is only 0.7 (meaning the stock is priced at a significant  discount to book value). While AIG was the most popular stock among hedge funds during the fourth quarter of 2012 (find more of hedge funds’ favorite stocks), it is not widely owned by large institutional investors such as mutual funds. BP plc (ADR) (NYSE:BP) also merits attention for a dividend yield of 5% at current prices and dividend levels.

BAUPOST GROUPSelling News Corp. One of Baupost’s largest holdings at the beginning of this year had been News Corp (NASDAQ:NWSA), but the fund sold a large portion of its shares between January and March. The pending breakup of News Corp (NASDAQ:NWSA) has attracted considerable attention from value investors, and the stock is currently up 67% from its levels a year ago. The forward P/E here is only 17, and while that isn’t value territory it could leave the stock undervalued if business grows at a pace similar to current rates (revenue rose 14% last quarter compared to the fourth quarter of 2012) and if management capitalizes on the breakup by improving efficiencies at the child companies.

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