What Does Seth Klarman’s Baupost See In BP plc (ADR) (BP)?

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For about a year, oil major BP plc (ADR) (NYSE:BP) has been the largest position in the Baupost Group’s portfolio, according to 13Fs filed with the SEC (we track 13Fs as part of our work developing investment strategies; we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year). In the first quarter of this year, Baupost- which is managed by Seth Klarman, whose 1991 investing book Margin of Safety has sold for as much as $1,500- increased its holdings of BP plc (ADR) (NYSE:BP) by 57%, to a total of over 17 million shares. See more of Klarman’s stock picks.

BP plc (ADR) (NYSE:BP)’s revenue slipped slightly last quarter compared to the first quarter of 2012, though earnings per share showed substantial improvements and adjusted EPS beat analyst expectations. The company has been selling off some of its assets in order to fortify its balance sheet, though BP plc (ADR) (NYSE:BP) has been increasing its quarterly payments over the last couple years as management has become more confident in its cash flows. Currently investors receive quarterly payments of 54 cents per share, which equates to a dividend yield of 5%. Dividend payments are still well below what they were in early 2010 prior to the Deepwater Horizon disaster, however.

BAUPOST GROUPBP plc (ADR) (NYSE:BP) certainly looks cheap, at a valuation of 7 times forward earnings estimates (we don’t consider the company’s trailing EPS, which are higher than the consensus figures for 2014, that relevant given management’s activity in selling off assets). So there is both a value case for the stock- its earnings multiples are low, and business appears somewhat stable- and a high yield. We’d note that in statistical terms, the stock tends to be highly dependent on the movements of broader market indices given its beta of 2.2, and certainly energy prices would be tied to the macroeconomy. In addition to Baupost’s interest in the company, our database of 13F filings shows that the Bill and Melinda Gates Foundation Trust owned 7.1 million shares as of the end of March (find more stocks the trust owns).

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