In this article, we discuss 12 high growth value stocks to buy according to Seth Klarman. If you want to see more stocks in this selection, head over to 5 High Growth Value Stocks to Buy According to Seth Klarman.
Legendary value investor Seth Klarman informed his hedge fund investors on February 8 that the Federal Reserve’s actions in response to the financial crisis of 2008, along with the following decade of low interest rates, had contributed to the creation of a “financial fantasyland.” The leader of Baupost Group, Seth Klarman, stated in a letter to clients at the end of the year:
“A consequence-free era of virtually unlimited low-cost capital had come to an end. A boom based on easy-money policies will inevitably contain the seeds of its own destruction.”
Despite the surge in major global stock indices this year due to declining inflation figures, a pessimistic perspective has emerged. This view opposes the belief that the Federal Reserve may soon stop increasing interest rates, which has bolstered investor confidence. Seth Klarman said that the sudden spike in interest rates last year is like kryptonite, as it finally led to the deflation of the “everything bubble.” This included the decline of investments in unprofitable “growth” companies that had risen during the pandemic but had little fundamental worth. Regardless of the recovery of markets this year, Klarman cautioned that the decline in markets from last year still has potential to continue, and there may be a risk of a sovereign debt crisis in the future.
He further wrote in the letter to clients at year-end:
“Time spent on due diligence came to seem to them a hindrance to maximal capital deployment, and the usual warning signs of excess — financial profligacy, a proliferation of dubious business models, and obvious red flags — were mocked or ignored.”
Despite dire warnings about the stock market, in the final quarter of last year, Seth Klarman significantly increased his firm’s holdings in Amazon.com, Inc. (NASDAQ:AMZN), among other major technology companies. Klarman also boosted his stake in Alphabet Inc. (NASDAQ:GOOG) by 190%, while his ownership in Meta Platforms, Inc. (NASDAQ:META) increased by 151%.
Our Methodology
We selected the stocks from the Q4 portfolio of Baupost Group which exhibit the highest average 3-year revenue growth between 2019 and 2021. Not all of these stocks are pure “value” stocks, but Klarman, who is a pure value investor, having huge stakes in these companies makes them worthy of attention and being treated as value plays in the long-term context. The list is ranked in the ascending order of Seth Klarman’s stake value in each firm.
Seth Klarman of Baupost Group
High Growth Value Stocks to Buy According to Seth Klarman
12. Herbalife Nutrition Ltd. (NYSE:HLF)
Number of Hedge Fund Holders: 24
Baupost Group’s Stake Value: $29,760,000
3-year Revenue Growth: 18.9%
Herbalife Nutrition Ltd. (NYSE:HLF) is a California-based provider of health and wellness products in the areas of weight management, targeted nutrition, energy, sports, fitness, and outer nutrition. In Q4 2022, Seth Klarman added Herbalife Nutrition Ltd. (NYSE:HLF) to his portfolio by acquiring 2 million shares worth nearly $30 million. On February 14, Herbalife Nutrition Ltd. (NYSE:HLF) reported a Q4 non-GAAP EPS of $0.53, beating market estimates by $0.19. The revenue of $1.2 billion outperformed Wall Street consensus by $70 million.
On February 3, BofA analyst Anna Lizzul initiated coverage of Herbalife Nutrition Ltd. (NYSE:HLF) with an Underperform rating and a $14 price target. According to BofA, Herbalife Nutrition Ltd. (NYSE:HLF)’s multi-level marketing (MLM) business model is the biggest danger to its operations because it is harder to see the sales channel of direct sellers compared to retail-based companies. Furthermore, the firm stated that there is still a risk for the company in emerging markets.
According to Insider Monkey’s third quarter database, 24 hedge funds were long Herbalife Nutrition Ltd. (NYSE:HLF), compared to 28 funds in the prior quarter. William Duhamel’s Route One Investment Company held the largest stake in the company, with 10.8 million shares worth $215.7 million.
In addition to Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc. (NASDAQ:GOOG), and Meta Platforms, Inc. (NASDAQ:META), Herbalife Nutrition Ltd. (NYSE:HLF) is one of the high growth stocks that Seth Klarman is piling into.
Here is what Bronte Capital has to say about Herbalife Nutrition Ltd. (NYSE:HLF) in its Q3 2021 investor letter:
“Herbalife is – as we have discussed many times before – a multi-level marketing scheme selling weight-loss shakes. The idea is simple. If I replaced six meals a week with low-calorie protein shakes and I walked an extra 15 km a week I would quickly lose 15-20kgs. It would be good for me. It is also well-nigh impossible to do.
One solution is to hire a personal trainer (usually of the opposite sex) and have them nag you. You will do tough stuff for an attractive member of the opposite sex. More realistically you could just have your friends nag you. And that is why this works so well as a multi-level marketing scheme. The person who sells you the shakes has an incentive to keep you on the diet.
We have looked at many distributors and we see a weight-loss program – implemented for (literally) millions of people – which works about as well as any weight-loss health program that ever existed. That still means it fails most of the time – but it works enough that we can be proud of owning this stock and the health benefits it provides. Herbalife, it turns out, grew well during COVID. This was initially a surprise to us – as we thought Herbalife depended on the personal touch to make the sale. But, instead, weight loss and associated social clubs moved online – and – in many cases were the main social outlet the customers had.”
11. Gray Television, Inc. (NYSE:GTN)
Number of Hedge Fund Holders: 29
Baupost Group’s Stake Value: $39,277,000
3-year Revenue Growth: 13.7%
Gray Television, Inc. (NYSE:GTN) was founded in 1891 and is headquartered in Atlanta, Georgia. It is a television broadcasting company that owns and operates television stations and digital assets in the United States. Seth Klarman increased his Gray Television, Inc. (NYSE:GTN) stake by 8% in Q4 2022, holding 3.51 million shares worth $39.2 million.
On November 10, Barrington analyst James Goss reiterated an Outperform rating on Gray Television, Inc. (NYSE:GTN) but lowered the firm’s price target on the shares to $15 from $25. The analyst’s previous target was much higher, but his new target for 2023 is based on the company’s reduced political forecasts, new guidance indicating a steeper decrease in subscriber levels than previously seen, and a more cautious target multiple. He informed investors that these factors led to his more conservative price target.
According to Insider Monkey’s data, Gray Television, Inc. (NYSE:GTN) was part of 29 hedge fund portfolios at the end of Q3 2022, compared to 25 in the prior quarter. Anand Desai’s Darsana Capital Partners is the largest stakeholder of the company, with 4.5 million shares worth $65.7 million.
10. Lithia Motors, Inc. (NYSE:LAD)
Number of Hedge Fund Holders: 45
Baupost Group’s Stake Value: $51,185,000
3-year Revenue Growth: 80.1%
Lithia Motors, Inc. (NYSE:LAD) operates as an automotive retailer in the United States. The company operates through three segments – Domestic, Import, and Luxury. Klarman’s Baupost Group owns 250,000 shares of Lithia Motors, Inc. (NYSE:LAD) worth $51 million as of Q4 2022. With average 3-year revenue growth exceeding 80%, it is one of the top high growth stocks in Klarman’s portfolio.
On February 15, Lithia Motors, Inc. (NYSE:LAD) declared a quarterly dividend of $0.42 per share, in line with previous. The dividend is payable on March 24, to shareholders of record on March 10.
Guggenheim analyst Ali Faghri on February 16 maintained a Buy rating on Lithia Motors, Inc. (NYSE:LAD) but lowered the price target from $343 to $332, despite the company’s Q4 earnings falling short of Street expectations. The analyst believes that the market’s negative reaction to the company’s results was primarily due to a significant miss in sales, general, and administrative expenses, as well as a decline in new sales volumes, compared to its peers’ strong performance. While the firm has lowered its 2023 estimate, it is optimistic that earnings will hit a low point in 2023, and then gradually increase in 2024 before “significantly accelerating” in 2025.
According to Insider Monkey’s Q3 data, 45 hedge funds were long Lithia Motors, Inc. (NYSE:LAD), compared to 40 funds in the prior quarter. David Abrams’ Abrams Capital Management is the leading position holder in the company, with 2.35 million shares worth $504.4 million.
Here is what Oakmark Select Fund has to say about Lithia Motors, Inc. (NYSE:LAD) in its Q1 2022 investor letter:
“As is typical during periods of significant volatility, we added a new name to the portfolio. Lithia Motors (NYSE:LAD) is the largest franchised auto dealer group in the United States. The company has a long history of creating shareholder value through best-in-class operations and consistent acquisitions of smaller dealers at attractive returns. There is a long runway for management to continue creating value through such acquisitions. Management believes this will drive earnings per share to more than $50 by 2025, even as car prices return to pre-pandemic levels. Meanwhile, Lithia has a significant opportunity to further accelerate growth through Driveway, its online auto retailing platform. We believe Lithia’s existing nationwide infrastructure provides Driveway with significant competitive advantages in e-commerce, which smaller dealers will struggle to replicate. Driveway is not generating any earnings today, but it could become a major contributor over the next five to seven years. With the stock priced at less than 7x management’s 2025 EPS target and with substantial future growth potential from Driveway, we believe Lithia shares are a bargain today.”
9. Amazon.com, Inc. (NASDAQ:AMZN)
Number of Hedge Fund Holders: 269
Baupost Group’s Stake Value: $83,160,000
3-year Revenue Growth: 67.4%
Securities filings for the fourth quarter of 2022 reveal that Seth Klarman’s Baupost Group boosted its Amazon.com, Inc. (NASDAQ:AMZN) stake by 300%, holding 990,000 shares worth over $83 million. On February 2, the company reported a Q4 non-GAAP EPS of $0.03, falling short of market estimates by $0.14. Revenue over the period came in at $149.2 billion, up 8.6% year-over-year, beating Wall Street consensus by $3.43 billion.
According to Loop Capital analyst Rob Sanderson, Amazon.com, Inc. (NASDAQ:AMZN)’s Q4 results indicate that the company’s retail business is making significant strides toward improving its unit economics. The analyst noted that if non-recurring charges for employee severance, impairment charges, and increased insurance liabilities are removed, the company’s North America operating margin would have been around 2.6% instead of the reported -0.3%. He maintained a Buy rating and a $140 price target on Amazon.com, Inc. (NASDAQ:AMZN) on February 14. However, the analyst also cautioned that AWS is experiencing more substantial margin compression and slowdown than previously anticipated, and the firm is adopting a more conservative outlook for this segment.
According to Insider Monkey’s Q3 data, 269 hedge funds were bullish on Amazon.com, Inc. (NASDAQ:AMZN), compared to 252 stocks in the prior quarter. Ken Fisher’s Fisher Asset Management is a significant position holder in the company, with approximately 50 million shares worth $5.6 billion.
Diamond Hill Large Cap Strategy made the following comment about Amazon.com, Inc. (NASDAQ:AMZN) in its Q4 2022 investor letter:
“At Amazon.com, Inc. (NASDAQ:AMZN), recessionary and inflationary headwinds drove weaker demand and higher costs for its AWS (Amazon Web Services) and retail businesses. While overinvestment in the retail business during the pandemic and continued growth of investments in AWS could lead to near-term pressure on profitability, we believe Amazon’s competitive advantages will continue to grow and that the business has the potential to grow much faster than the overall economy in the coming years.”
8. Fidelity National Information Services, Inc. (NYSE:FIS)
Number of Hedge Fund Holders: 60
Baupost Group’s Stake Value: $146,217,000
3-year Revenue Growth: 34.2%
Fidelity National Information Services, Inc. (NYSE:FIS) is a Florida-based company that provides technology solutions for merchants, banks, and capital markets firms worldwide. It operates through Merchant Solutions, Banking Solutions, and Capital Market Solutions segments. Klarman boosted his stake in Fidelity National Information Services, Inc. (NYSE:FIS) by 251% in Q4 2022, holding 2.15 million shares worth $146.2 million.
On February 13, Fidelity National Information Services, Inc. (NYSE:FIS) reported a Q4 non-GAAP EPS of $1.71 and a revenue of $3.71 billion, beating Wall Street estimates by $0.01 and $20 million, respectively.
According to a research note by UBS analyst Rayna Kumar on February 14, Fidelity National Information Services, Inc. (NYSE:FIS) has announced that it will be executing a tax-free spin-out of its Merchant Solutions business. However, the analyst believes that investors would have preferred a sale of the business rather than a spin-out. As a result, the analyst has lowered the firm’s price target on FIS from $86 to $78 while maintaining a Buy rating on the shares.
According to Insider Monkey’s Q3 data, 60 hedge funds were bullish on Fidelity National Information Services, Inc. (NYSE:FIS), compared to 67 in the prior quarter. Select Equity Group held the largest stake in the company, comprising 5.8 million shares worth $443.5 million.
Diamond Hill Large Cap Strategy made the following comment about Fidelity National Information Services, Inc. (NYSE:FIS) in its Q4 2022 investor letter:
“In addition to SVB Financial and V.F. Corporation, we eliminated our positions in financial services technology company Fidelity National Information Services, Inc. (NYSE:FIS) and media and technology company Comcast Corporation. Several reasons factored into our decision to sell Fidelity National Information Services, including board and leadership changes, a strategic review, and a cooperation agreement with activist shareholder D.E. Shaw (and discussions with JANA Partners).”
7. Micron Technology, Inc. (NASDAQ:MU)
Number of Hedge Fund Holders: 74
Baupost Group’s Stake Value: $164,233,000
3-year Revenue Growth: 18.3%
Micron Technology, Inc. (NASDAQ:MU) was founded in 1978 and is headquartered in Boise, Idaho. The company designs, develops, and manufactures memory and storage products worldwide. It operates through four segments – Compute and Networking Business Unit, Mobile Business Unit, Embedded Business Unit, and Storage Business Unit. As of Q4 2022, Seth Klarman owns 3.28 million shares worth $164.2 million, representing 2.67% of the total 13F securities. It is one of the top high growth stocks owned by Klarman.
On February 10, Mizuho analyst Vijay Rakesh upgraded Micron Technology, Inc. (NASDAQ:MU) from Neutral to Buy and raised the price target from $48 to $72. The analyst cited improving structural trends that are expected to accelerate the path to supply/demand balance for memory as the main driver of the upgrade. According to the analyst, Micron Technology, Inc. (NASDAQ:MU), along with Western Digital and Seagate, are close to a cyclical bottom, with Q1 potentially marking the peak in inventories and a low point in revenue.
According to Insider Monkey’s third quarter database, Micron Technology, Inc. (NASDAQ:MU) was part of 74 hedge fund portfolios, compared to 69 in the earlier quarter. Jim Simons’ Renaissance Technologies is the biggest stakeholder of the company, with 7.4 million shares worth $374 million.
Here is what Claret Asset Management has to say about Micron Technology, Inc. (NASDAQ:MU) in its Q3 2022 investor letter:
“Inflation is still higher than interest rates… not an incentive to save for most people. Either inflation must come down or interest rates have to go up further. Or both. And probably both. Now that they are taking the punch bowl away and the party is over, what happens next? For whatever reason, the stock market seems to always precede the economic reality: Micron reached a high of $98.45 on January 5th, 2022 and is trading at $50.00 today.”
6. New Oriental Education & Technology Group Inc. (NYSE:EDU)
Number of Hedge Fund Holders: 29
Baupost Group’s Stake Value: $201,745,000
3-year Revenue Growth: 38.1%
New Oriental Education & Technology Group Inc. (NYSE:EDU) is a Beijing-based provider of private educational services under the New Oriental brand in the People’s Republic of China. The company operates through Educational Services and Test Preparation Courses, Online Education and Other Services, Overseas Study Consulting Services, and Others segments. As per 13F filings from Q4 2022, Klarman owns 5.8 million shares of New Oriental Education & Technology Group Inc. (NYSE:EDU) worth $201.7 million.
On January 17, New Oriental Education & Technology Group Inc. (NYSE:EDU) reported a FQ2 Non-GAAP EPADS of $0.10, beating market estimates by $0.01. The revenue of $638.2 million also outperformed consensus by $24.04 million. The company anticipates a growth in revenue in Renminbi as its functional currency for the third quarter of fiscal year 2023, with a projected increase of around 24% to 27%.
According to Insider Monkey’s Q3 data, 29 hedge funds were long New Oriental Education & Technology Group Inc. (NYSE:EDU), compared to 22 funds in the prior quarter. Fang Zheng’s Keywise Capital Management is a prominent stakeholder of the company, with nearly 4 million shares worth $95 million.
Like Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc. (NASDAQ:GOOG), and Meta Platforms, Inc. (NASDAQ:META), New Oriental Education & Technology Group Inc. (NYSE:EDU) is one of the high growth stocks on Seth Klarman’s radar.
Here is what Polen International Growth has to say about New Oriental Education & Technology Group Inc. (NYSE:EDU) in its Q3 2021 investor letter:
“The quarter’s leading detractors were Chinese companies that were impacted by the CCP’s regulatory crackdown and liquidity concerns at property developer Evergrande. New Oriental Education—the largest provider of private educational services in China—moved sharply lower in July after policymakers implemented new rules which effectively turned Chinese tutoring companies into non-profits. Looking at New Oriental Education, we closed our position as soon as government policy became clear and used the proceeds to allocate to existing holdings.”
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Disclosure: None. 12 High Growth Value Stocks to Buy According to Seth Klarman is originally published on Insider Monkey.