In this article, we discuss the 10 value stocks to buy according to billionaire Seth Klarman. If you want to skip our detailed analysis of these stocks, go directly to the 5 Value Stocks to Buy According to Billionaire Seth Klarman.
Seth Klarman is among a rare breed of billionaires who have achieved “cult hero” status on Wall Street through a long-term value investing strategy that has paid off handsomely. Klarman manages Boston-based Baupost Group, a hedge fund that had a portfolio value of more than $10.8 billion at the end of the third quarter of 2021. Klarman is the “investor of investors” as his popularity among finance professionals far exceeds his fame among the general public. He has a personal net worth of around $1.5 billion.
One interesting read that helps explain the legend of Klarman and Baupost Group over the past few decades is Margin of Safety, a book authored by the billionaire in 1991 that was self-published with around 5,000 copies and sold for around $25 per piece. Over the years, the book has achieved best-seller status and the original copies sell for as much as $4,000 depending on their condition. Klarman is sometimes also compared to Warren Buffett due to his “risk-averse” investing strategy.
Some of the top stocks in the portfolio of Baupost Group at the end of September included Alphabet Inc. (NASDAQ:GOOG), Intel Corporation (NASDAQ:INTC), and Micron Technology (NASDAQ:MU), among others discussed in detail below.
The companies listed below were taken from the investment portfolio of Baupost Group at the end of the third quarter of 2021. Those that have a Price-to-Earnings (PE) ratio of 15 or less were preferred for the list.
The analyst ratings and business fundamentals of the firms are also discussed to provide readers with some additional context for their investment choices. The hedge fund sentiment around each stock was calculated using the data of 867 hedge funds tracked by Insider Monkey.
Value Stocks to Buy According to Billionaire Seth Klarman
10. Shaw Communications Inc. (NYSE:SJR)
Number of Hedge Fund Holders: 21
PE Ratio: 19.53
Shaw Communications Inc. (NYSE:SJR) is a Canada-based connectivity company. At the end of the third quarter of 2021, Baupost Group owned 7.5 million shares in Shaw Communications Inc. (NYSE:SJR) worth $218 million, representing 2.00% of the portfolio.
Shaw Communications Inc. (NYSE:SJR) has an impressive dividend history and recently declared a quarterly dividend of $0.0985 per share, in line with previous. The forward yield was 4.06%.
Among the hedge funds being tracked by Insider Monkey, Illinois-based investment firm Magnetar Capital is a leading shareholder in Shaw Communications Inc. (NYSE:SJR) with 5 million shares worth more than $148 million.
Just like Alphabet Inc. (NASDAQ:GOOG), Intel Corporation (NASDAQ:INTC), and Micron Technology (NASDAQ:MU), Shaw Communications Inc. (NYSE:SJR) is one of the stocks that hedge funds are buying.
9. Willis Towers Watson Public Limited Company (NASDAQ:WLTW)
Number of Hedge Fund Holders: 75
PE Ratio: 13.31
Willis Towers Watson Public Limited Company (NASDAQ:WLTW) operates in the insurance brokerage industry. Regulatory filings show that Baupost Group owned 1 million shares in Willis Towers Watson Public Limited Company (NASDAQ:WLTW) at the end of the third quarter of 2021 worth over $232 million, representing 2.13% of the portfolio.
Truist analyst Mark Hughes recently raised the price target on Willis Towers Watson Public Limited Company (NASDAQ:WLTW) stock to $310 from $290 and kept a Buy rating on the shares, noting the organic growth of the firm and appreciating the third quarter earnings.
Among the hedge funds being tracked by Insider Monkey, New York-based investment firm First Eagle Investment Management is a leading shareholder in Willis Towers Watson Public Limited Company (NASDAQ:WLTW) with 4.7 million shares worth more than $1.1 billion.
In its Q3 2021 investor letter, Alluvial Capital Management, an asset management firm, highlighted a few stocks and Willis Towers Watson Public Limited Company (NASDAQ:WLTW) was one of them. Here is what the fund said:
“The second position is much larger and was thrown into our hands by an unexpected turn of events. It is the stock of Willis Towers Watson. This is a British company with roots dating back to 1828. WLTW is the third-largest insurance broker in the world. This is a sector with which we are very familiar, as some time ago we held in our portfolio shares of its slightly larger competitor AON.
It was AON in fact that announced last spring it had agreed to merge with WLTW. In the merger, WLTW shareholders would have received AON shares. As is usually the case with such announcements, investors stepped in to conduct what is known as merger arbitrage. In this particular case, they bought WLTW shares and sold short AON shares in order to profit from the fact that the prices of the two stocks did not yet fully reflect the exchange ratio in the merger. Moreover, merger arbitrage commonly makes extensive use of leverage in order to increase profits.
This summer, however, AON and WLTW jointly announced that they were pulling out of the planned merger because they had not received approval from the US Department of Justice. The regulator had feared that in an already quite concentrated industry, a merger of the second- and third-largest players would restrict competition too much. The immediate reaction to this announcement was, of course, closing of positions from the merger arbitrage. This brought an immediate increase in the price of AON shares and decline in the price of WLTW shares. We saw this as an excellent buying opportunity in WLTW stock. (In addition, WLTW had received a USD 1 billion breakup fee from AON.) Because we knew the industry and the two companies well from earlier years, we were able to react immediately, and a new, very attractive investment appeared in Vltava Fund’s portfolio rather unexpectedly and quickly.
Insurance brokerage is a very good business. Simply put, insurance brokers are intermediaries who sell, find, or negotiate insurance on behalf of a client for a fee. They do not bear the insurance risk themselves and thereby do not risk their own capital. They live from commissions and the fact that this is a large and recurring business. Just to give you a sense of this, I will note, for example, that of the 500 companies in the Fortune Global 500 list, more than 90% are clients of WLTW. The entire industry is very concentrated and has relatively high barriers to entry. WLTW is the third-largest global player, has very high free cash flow, low capital investment requirements, and a very valuable client base. The business as a whole also provides some long-term inflation protection, as the speed at which the volume of total premiums grows follows the speed at which the economy and asset prices grow in nominal terms. I have to say we are very happy that circumstances have passed this investment on to us.”
8. Garrett Motion Inc. (NASDAQ:GTX)
Number of Hedge Fund Holders: 21
PE Ratio: 3.27
Garrett Motion Inc. (NASDAQ:GTX) makes and sells auto parts and equipment. Securities filings show that Baupost Group owned 3.5 million shares in Garrett Motion Inc. (NASDAQ:GTX) at the end of the third quarter of 2021 worth $26.3 million, representing 0.24% of the portfolio.
Garrett Motion Inc. (NASDAQ:GTX) had announced earlier this year that it would be expanding a production facility in China by around 50% to meet increased demand for products. The expansion is expected to be complete within the first quarter of 2022.
At the end of the third quarter of 2021, 21 hedge funds in the database of Insider Monkey held stakes worth $236 million in Garrett Motion Inc. (NASDAQ:GTX), up from 17 in the previous quarter worth $262 million.
Klarman is a fan of value plays such as Garrett Motion as well as growth stocks like Alphabet Inc. (NASDAQ:GOOG), Intel Corporation (NASDAQ:INTC), and Micron Technology (NASDAQ:MU).
In its Q2 2021 investor letter, Alluvial Capital Management, an asset management firm, highlighted a few stocks and Garrett Motion Inc. (NASDAQ:GTX) was one of them. Here is what the fund said:
“We owe a large portion of this quarter’s gains to a new investment in Garrett Motion Inc. We participated in the company’s post-bankruptcy recapitalization through our purchase of Garrett Motion preferred shares.
Garrett Motion is a manufacturer of automotive turbochargers that was spun off from Honeywell in 2018. Honeywell gave Garrett Motion a parting gift of hundreds of millions in asbestos-related liabilities, which ultimately proved unmanageable and led to the company’s bankruptcy in late 2020. The resolution of the bankruptcy process allowed Garrett to shed many of its liabilities and to recapitalize the company with new debt and preferred stock. Shareholders were granted the right to subscribe for new Series A convertible preferred stock.
The rights offering bore all the classic signs of an attractive “special situation” investment. I believed the offering price of the preferred shares, $5.25, was significantly below their market value based on any reasonable estimate of Garrett Motion’s post-emergence performance. What really got me excited about these preferreds was the behavior of the large hedge funds backstopping the rights offering. These funds had the right to acquire all the preferred shares not purchased by holders of Garrett Motion common stock, and the subscription process was designed to be quite difficult for smaller, less sophisticated shareholders. Vague, confusing paperwork; attorney attestations; proof of financial status—clearly, these backstopping funds didn’t want anyone else to get their hands on these preferreds. And if these large, sophisticated funds with their deep involvement in the bankruptcy proceedings thought these preferreds were so great, well…that was not enough for me to say “I’m all in!”, but it did suggest taking a much closer look.
We subscribed for a healthy number of Garrett Motion preferreds, and our investment has been a good one to date. The preferreds trade nearly 50% over our subscription price. Nice to see, but I think the best is yet to come. Following the bankruptcy, Garrett Motion is a small company with a confusing capital structure (term debt, Series A preferreds, Series B preferreds, common stock), no analyst coverage, and no guidance from management. On top of that, Garrett’s business model faces long-term challenges as the internal combustion engine gives way to electric. It’s no wonder the market values Garrett at distressed levels. But Garrett will generate hundreds upon hundreds of millions in free cash flow each year for the next several years, which will allow the company to deleverage and simplify its balance sheet, invest in next-generation products, and reward shareholders. I fully expect the preferreds we hold to be valued at 2-3x the current price in just a few years’ time.”
7. Nexstar Media Group, Inc. (NASDAQ:NXST)
Number of Hedge Fund Holders: 38
PE Ratio: 7.42
Nexstar Media Group, Inc. (NASDAQ:NXST) is a media firm focusing on television and digital services. Latest data shows that Baupost Group owned 2 million shares of Nexstar Media Group, Inc. (NASDAQ:NXST) at the end of the third quarter of 2021 worth $310 million, representing 2.85% of the portfolio.
In earnings results for the third quarter, posted in early November, Nexstar Media Group, Inc. (NASDAQ:NXST) reported earnings per share of $3.90 and a revenue of $1.16 billion. The firm also declared a quarterly dividend of $0.70 per share in late October.
Among the hedge funds being tracked by Insider Monkey, Canada-based investment firm Cardinal Capital is a leading shareholder in Nexstar Media Group, Inc. (NASDAQ:NXST) with 1 million shares worth more than $166 million.
6. Veritiv Corporation (NYSE:VRTV)
Number of Hedge Fund Holders: 11
PE Ratio: 18.02
Veritiv Corporation (NYSE:VRTV) offers packing products and related services. According to regulatory filings, Baupost Group owned 3.5 million shares in Veritiv Corporation (NYSE:VRTV) at the end of September 2021 worth $319 million, representing 2.93% of the portfolio.
Veritiv Corporation (NYSE:VRTV) stock has returned more than 612% to investors over the past twelve months as the company posted market-beating earnings and inflation concerns increase interest around value plays.
At the end of the third quarter of 2021, 11 hedge funds in the database of Insider Monkey held stakes worth $354 million in Veritiv Corporation (NYSE:VRTV), down from 14 in the preceding quarter worth $254 million.
Alongside Alphabet Inc. (NASDAQ:GOOG), Intel Corporation (NASDAQ:INTC), and Micron Technology (NASDAQ:MU), Veritiv Corporation (NYSE:VRTV) is one of the stocks on the radar of institutional investors.
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Disclosure. None. 10 Value Stocks to Buy According to Billionaire Seth Klarman is originally published on Insider Monkey.