In this article we present the 10 best value stocks to buy now according to renowned value investor and billionaire Seth Klarman.
Billionaire investor and Baupost Group founder Seth Klarman is one of the most renowned value investors. Baupost Group managed to generate average returns of nearly 20% annually since founded in 1983. Seth Klarman’s value investing style is explained in his 1991 book, “Margin of Safety: Risk-averse value investing strategies for the thoughtful investor”.
Nowadays, some investors say that value investing strategies are less popular as investors are running behind high growth stocks even though these equities are trading at pricey valuations. Even though there is a cluster of stocks in bubble territory, we disagree that “value stocks” underperformed growth stocks. We believe traditional value investors sucked at identifying value stocks like Apple Inc (AAPL), Alphabet Inc (NASDAQ:GOOGL), Amazon.com (NASDAQ:AMZN), Alibaba (NYSE:BABA), Microsoft (NASDAQ:MSFT), and Facebook (NASDAQ:FB) 5-6 years ago.
A value stock is a stock that trades way below its intrinsic value. A stock that’s growing its topline by 20% a year can be a deep value stock at a PE multiple of 20 if you expect the stock to keep growing its topline around that 20% rate for at least a few years. Hedge funds, for the most part, flocked into today’s trillion dollar tech giants a decade ago which is why their stock picks outperformed the market. Take a look at this Insider Monkey article from 2012. We highlighted the top 5 stocks among hedge funds and billionaires more than 8 years ago. Facebook and Alibaba weren’t publicly traded at that time, so these two stocks weren’t in that list. Apple Inc. was the top stock among hedge funds. Google and Microsoft were the other two stocks. the only tech giant stock hedge funds were unable to identify in advance was Amazon.
By the way, hedge funds’ nearly 20/20 foresight wasn’t the case just at the specific time. The top 10 most popular stocks among hedge funds returned 240% since 2014, vs. 121% gain for the S&P 500 Index ETFs. The main reason hedge funds flocked into these top 10 stocks was that they thought these stocks are deeply undervalued and expected to outperform the market. In our opinion today’s top 10 hedge fund stocks are also the best value stocks to buy right now. You can see the latest list of top 10 hedge fund stocks here.
Klarman’s Baupost Group that manages over $9 billion has reported high single-digit returns last year, down significantly from the broader market returns.
In a letter to investors, the founder, and CEO of Baupost Group acknowledged that their favorite strategies are not working well in a current environment despite the fact that underlying factors of companies are supporting analysis.
“To be sure, today’s trend-following environment has left Baupost looking flat-footed, as some of the publicly-traded bargains we identify and accumulate drift relentlessly lower – even as we believe they demonstrate their underlying value in several ways,” Klarman said.
Despite the acknowledgment, Seth Klarman, who often being called “the next Warren Buffett”, has defended value investing techniques, saying “Once the market corrects those mispricings, it’ll be the twisted fruits that prove to be the smartest investments.”
According to the latest 13F filing, the prominent value investor has extended his value investing strategies, with the purchase of several new value stocks that had IPOs during the third quarter. These include Vesper Healthcare Acquisition (VSPRU), RedBall Acquisition (RBACU), Broadstone Acquisition (BSNU), and Reinvent Technology (RTPU).
Baupost Group has also created a stake in Applied Materials (AMAT), Micron Technology (MU), Howmet Aerospace (HWM), and Healthpeak Properties (PEAK).
At the end of the September quarter, the Boston-based hedge fund portfolio contained 36 stocks as the fund has added 10 new holdings. Klarman’s fund has also sold 5 stocks and added to its 6 existing positions. The fund manager also slashed its stake in 9 companies during the third quarter. Total assets under management jumped from $8.011 billion to above $9.2 billion.
The top ten holdings account for 66% of the overall portfolio. The portfolio is mostly focused on communication services (38.69%), technology (20.29%), and consumer cyclical (17.01%).
While Seth Klarman’s reputation remains intact, the same can’t be said of the hedge fund industry as a whole, as its reputation has been tarnished in the last decade during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 78 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Let’s start reviewing whether the top ten value stocks according to the value investing guru Seth Klarman are worth buying.
10. HP Inc. (NYSE: HPQ)
HPQ ranks 10th in our list of the 10 best value stocks to buy now. Baupost Group founder and CEO Seth Klarman have been holding a stake in the tech giant since the fourth quarter of 2019. HP (NYSE: HPQ), previously known as Hewlett-Packard Company, accounts for 2.73% of the portfolio and currently ranked as the 10th largest investment. The fund currently holds 13.3 million shares valued at $252 million.
Seth Klarman’s strategy of buying on discount and holding for the long-term clearly reflected through his HPQ investment. This is because HPQ shares were struggling last year when Klarman created a position during the fourth quarter. HPQ shares performed really well in the last six months, thanks to reports of increasing demand for PCs and other devices.
In addition to share price gains, Baupost Group has also bagged massive dividends. HP offers a dividend yield above 3.3%. Its dividend growth rate in the past five years stood around 18%. Its financial numbers and future fundamentals are backing gains. Desktop and notebook PCs global shipments are likely to grow around 18% Y/Y in the fourth quarter, with the forecast for 1.4% in 2021, according to new IDC data.
9. HD Supply Holdings, Inc. (NASDAQ: HDS)
The industrial distributor and maintenance facilitator HD Supply Holdings (NASDAQ: HDS) is among the favorite value stock picks of Seth Klarman. The firm first initiated a stake in HD Supply Holdings during the first quarter this year and the firm added to its existing position during the September quarter. The company accounts for 3.03% of the Baupost portfolio.
Several other hedge funds are also showing confidence in HD Supply Holdings. For instance, Lakewood Capital said, “the fund initiated a position in HD Supply, a leading industrial distributor focused on two separate markets, facilities maintenance and non-residential construction. We believe the upcoming spin-off of its more cyclical, non-residential construction business will highlight the company’s attractive facilities maintenance business, providing significant upside from the stock’s discounted valuation of under 9x last year’s consolidated EBITDA.”
Shares of industrial distributor and maintenance facilitator jumped 38% since the beginning of this year as Home Depot offered to buy the company for $56 per share.
8. PG&E Corporation (NYSE: PCG)
Seth Klarman has been optimistic about the electricity and gas provider PG&E Corporation (NYSE: PCG) over the years. The firm first bought PG&E shares during the first quarter of 2018 and added to its position in the following two quarters.
The hedge fund has further raised its stake in the second quarter of 2018 before selling a major stake during the first half of this year. However, Klarman’s fund has again increased its position by over 550% during the latest quarter.
PG&E Corporation’s investment currently accounts for 3.11% of the overall portfolio valued at $287 million. PG&E shares have been under pressure over the past two years, but value investing guru Seth Klarman sees the dip in the stock price as a buying opportunity.
7. Qorvo, Inc. (NASDAQ: QRVO)
The chipmaker Qorvo (NASDAQ: QRVO) has been in Seth Klarman’s portfolio since the first quarter of 2017. The fund has steadily increased its investments in the chipmaker in fiscal 2017 before selling a small number of shares in the last two quarters. Qorvo currently accounts for 4.12% of the portfolio valued at $382 million.
Shares of Qorvo soared almost 44% since the beginning of this year as the chipmaker is likely to be in a position to benefit from 5G smartphone shipments. Its deep relationships with numerous key original equipment manufacturers (OEMs) have been adding to growth prospects.
The company has generated 31% revenue growth in the latest quarter while earnings per share came in at $1.18 compared to $0.83 in the year-ago period.
6. Pershing Square Tontine (NYSE: PSTH)
Seth Klarman’s Baupost fund has created a new position in Bill Ackman’s Pershing Square Tontine (NYSE: PSTH) during the third quarter, with the purchase of 17.5 million shares. Pershing Square Tontine currently accounts for 4.28% of an overall portfolio valued at $397 million.
Pershing Square Tontine Holdings, Ltd. does not involve in noteworthy operations. The company seeks to effect a merger, asset acquisition, capital stock exchange, stock purchase, reorganization, or similar business combination. It was founded in 2020 and the company is based in New York, New York.
5. ViacomCBS (NASDAQ: VIAC)
ViacomCBS (NASDAQ: VIAC), which was previously known as CBS Corporation, continues to gain Seth Klarman’s confidence as the broadcasting company plans to aggressively expand its operations. It is the fifth-largest investment of Baupost Group, accounting for 5.70% of the portfolio.
Although the hedge fund has made no change in its position during the September quarter, Baupost Group has significantly added to its position in the past few quarters.
Shares of ViacomCBS soared sharply in the last six months, but its shares are still down 14% year to date. The broadcasting company has generated 85% revenue growth in the latest quarter. The company’s move towards the streaming business helped in enhancing the revenue growth in the latest quarter. ViacomCBS is a good stock to hold because it offers a dividend yield above 2.5%.
4. Viasat, Inc. (NASDAQ: VSAT)
Billionaire investor Seth Klarman appears to be the biggest fan of broadband and communications products provider Viasat (NASDAQ: VSAT). Baupost Group first initiated a position in Viasat in 2008. The hedge fund has added to its existing position during the third quarter after more than a 50% drop in share price this year. It currently represents the fourth largest investment of Klarman, accounting for 6.04% of the overall portfolio.
Shares of broadband and communications products provider have been under pressure this year due to slowing demand and softening outlook. The intense market competition also played a big role in negative revenue growth trends.
Its revenue has been hanging around $5.5 million over the past several quarters. The pandemic related challenges have also impacted Viasat performance in the past few quarters. Viasat shares are currently trading around $34, down 40% in the past five years and 20% in the last ten years.
3. Fox Corporation (NASDAQ: FOXA)
Baupost Group has initiated a position in Fox Corporation (NASDAQ: FOXA) at the beginning of 2018 and it currently represents its third-largest investment valued at $750 million. Klarman has dropped its stake by 1% in news, sports, and entertainment company during the third quarter.
Shares of Fox Corporation have been under pressure over the past two years amid strong market competition and slow revenue growth. The company has generated only 2% revenue growth in the latest quarter as pandemic has lowered its revenue from sports activities.
The company says, “We have successfully adapted to changes in the sports calendar and entertainment production schedules to deliver key programming to audiences and advertisers across FOX, most notably at our local television stations where political advertising will have achieved a record for any election.”
2. Liberty Global plc (NASDAQ: LBTYK)
British-Dutch-American multinational telecommunications company Liberty Global (NASDAQ: LBYT) is the second-largest stock holding of Baupost Group, according to the latest filings. Liberty Global currently holds 12.09% space in Klarman’s portfolio valued at $1.12 billion. The firm first initiated a position during the third quarter of 2018 and it has left its position unchanged in the latest quarter.
Liberty Global’s share price is up 10% this year. The investors have appreciated the company’s move of acquiring Sunrise in Switzerland and a joint venture with Telefonica’s in the U.K. In addition, the British-Dutch-American multinational telecommunications company has also supported investor’s sentiments through its aggressive share buyback plans.
The CEO Mike Fries said, “As the COVID-19 pandemic has altered the way we all work and live, our fiber-rich networks continue to deliver seamless connectivity that has never been more crucial. During the quarter, we continued to see strong demand for our high-speed connectivity products, adding 37,000 new customer relationships and over 70,000 broadband subscribers.”
1. eBay (NASDAQ: EBAY)
The e-commerce company eBay (NASDAQ: EBAY) is the largest stock holding of Seth Klarman’s Baupost Group, according to the latest filings. The firm created a position in the online retailers in the fourth quarter of 2018 and it currently accounts for 16% of a portfolio valued at $1.5 billion. Klarman’s hedge fund has slashed its stake in eBay by 6% in the latest quarter.
Shares of eBay rose sharply this year as social distancing policies shifted consumer’s focus towards online platforms. eBay benefited from consumer’s move towards online platforms. Its revenue of $2.61 billion in the latest quarter jumped 25% from the previous year’s period, with expectations that revenue growth momentum will extend into the next years.
eBay’s strategy of offering dividends to its investors makes it a good stock to hold for the long-term. The internet stock currently offers a quarterly dividend of $0.16 per share, yielding above 1%. Its stock price soared 42% soar so far this year.
Please also see: Seth Klarman’s Top Stock Picks and Baupost Group is Betting on eBay (EBAY) Stock
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