Seth Klarman manages one of the largest hedge funds in the world, The Baupost Group, founded in 1983 and managing some $7 billion. Klarman and his hedge fund invest across a number of areas and investments, including value-oriented stocks and distressed debt. Of late, it appears that Klarman is overly bearish on the tech industry, while being bullish on a highly popular insurance stock.
Baupost Group took a new stake in American International Group Inc (NYSE:AIG), now making up the sixth-largest position in Baupost’s portfolio. Even amid the “bailout” upheaval, AIG remains one of the top sellers of workers comp, professional liability, and property coverage. The company remains committed to de-risking and re-focusing on core insurance operations, which I think is a long-term positive.
Around 60% of revenues are generated by its general insurance segment, which underwrites various business insurance products, including large commercial or industrial property insurance and liability. Meanwhile, another 20% of revenues is generated from SunAmerica Financial, the domestic life insurance and retirement services segment.
Both of these major insurance segments are a big part of of American International Group Inc (NYSE:AIG) revenues, and should also help the company continue its post bailout growth. From a valuation standpoint, at the end of 2012 American International Group Inc (NYSE:AIG)’s book value per share, rose to $66, a 24% increase year over year. Yet, the stock trades at just over half this.
Tech is out of favor
Baupost had 7.4% of its portfolio invested in HP at the end of the third quarter. HP continues to see weakness related to its PC and PC-related products business. This is in part due to the competitive pressures the company is faced with, coming from the likes of other tech companies, such as IBM, EMC, Dell, Apple, BMC Software, Canon, Lexmark and Samsung, just to name a few.
The notable pressures for HP should continue, as the tech company still gets more than 50% of its revenue from PC and printer sales. Challenges for these industries (PCs and printers) are tied to secular declines and cannibalization by mobile computing devices.
If there were a tech company that I think Klarman should own, it would be the impressively diverse Microsoft Corporation (NASDAQ:MSFT), but he chose to exit the stock last quarter. The company is undoubtedly seeing pressure from a declining PC market, thanks in part to its dominant position in the desktop and notebook market, with respect to operating systems. However, the company is making strides to hedge this exposure with its recent launch of a tablet and embarking on mobile with a mobile operating system. As far as how HP and Microsoft Corporation (NASDAQ:MSFT)’s growth stacks up, HP is expected to grow EPS at only 0.25% over the next five years, while Microsoft is expected to grow at 9%.
As far as downsizing, Baupost cut stakes in Oracle (NASDAQ:ORCL) and News Corp (NASDAQ:NWSA), selling off 22% and 36% of its 3Q stake, respectively. Oracle has a relatively high amount of debt, with over $19 billion in notes payable as of last quarter, compared to the $15 billion in the previous quarter.