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Why These Billionaire Seth Klarman’s Stock Picks Deserve Your Attention

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Much has been said about hedge fund underperformance this year, but believing in that general assessment can mislead people into overlooking outstanding performances by certain hedge funds. We at Insider Monkey found out that the 30 mid-cap stocks preferred by the best performing hedge funds generated a return of 18% in the 12 months ending November 21, surpassing the S&P 500 Index’s 7.6% return in the same period, with as more than 51% of the stocks in the index fail to beat the benchmark. In addition, based on Inside Monkey’s research into 659 hedge funds, 627 funds containing at least 5 long positions in companies valued at $1 billion or more have gained 8.3% in returns on average from their long picks, a full 5.0 percentage above S&P 500 ETF returns.

Billionaire Seth Klarman’s Baupost Group is one of the outperforming hedge funds. Earlier this year, Time called Klarman “the Next Warren Buffett” due to his investing prowess, as the Boston-based hedge fund amassed $22.6 billion in net profit, at a yearly annual return rate of 16.4%, between 1982 and 2015. Based on Insider Monkey’s comprehensive backtests, Baupost Group returned 1.22% per month between 1999 and 2012 from its positions in companies with market cap above $10 billion, compared with S&P 500’s 0.22% monthly gains. The Boston-based hedge fund thus beat the index by 1.0 percentage point per month, or 12% on an annualized basis, in this period. We note that Klarman is a conservative investor with unconventional methods, which include investments in unpopular, undervalued assets, as well as the use of complex derivatives and put options. Having this sterling performance in mind, let’s have a look at Baupost Group’s top picks in the third quarter in companies with market caps above $10 billion.

BAUPOST GROUP

Cheniere Energy, Inc. (NYSEMKT:LNG) remained Baupost Group’s biggest holding despite the hedge fund’s sale of about 2.0 million shares during the third quarter. Baupost Group owned 27.84 million Cheniere Energy shares worth $1.21 billion at the end of September. The heft of Baupost’s holdings in Cheniere Energy is notable given the sharp fall in gas prices earlier this year. The liquefied natural gas company recently called off its proposal to merge with Cheniere Energy Partners LP Holdings LLC (NYSEMKT:CQH). On the back of the news, Credit Suisse reaffirmed its “Outperform” rating on Cheniere Energy’s stock, but trimmed the price target to $52 from $54, saying that the previous valuation was based on the assumption that the merger will be completed. Year-to-date, Cheniere Energy’s stock grew by more than 16%. A total of 45 funds tracked by Insider Monkey held positions in Cheniere Energy, Inc. (NYSE MKT:LNG) at the end of the third quarter, compared to 42 funds at the end of June.

Baupost Group initiated a stake in the private label credit card company Synchrony Financial (NYSE:SYF), having acquired 17.57 million shares valued at $491.82 million during the third quarter. So far, analysts have divergent views on Synchrony’s stock. Stephens initiated coverage on the company with a “Buy” rating and a $40 price target in November and earlier this month Wedbush downgraded the stock to “Neutral” from “Outperform” with a $37 price target. Synchrony recently has reported that its third-quarter net interest income rose by 12% on the year to $3.48 billion, while its net earnings increased by 5% to $604 million. The company’s stock advanced by 19% year-to-date. Among hedge funds tracked by Insider Monkey, 48 funds held shares of Synchrony Financial (NYSE:SYF) at the end of the third quarter, down by 12 funds over the quarter
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