6 Defensive Stocks To Buy In 2022 According to Seth Klarman

In this article, we discuss the 6 defensive stocks to buy in 2022 according to Seth Klarman.

Seth Klarman is the man behind Baupost Group, a hedge fund he was asked to run by a group of professors while he was studying for an MBA at Harvard Business School in 1982. He has been at the helm since, currently serving as its chief executive, president and portfolio manager. The 65-year old has established Baupost as one of the most renowned hedge funds on Wall Street, posting an impressive average annual return of more than 20% since being founded. Klarman is personally worth $1.5 billion according to Forbes, and has donated to various philanthropic causes worldwide, including sizeable donations to the Democratic party and causes in Israel.

Klarman follows the ‘value investing’ philosophy of Benjamin Graham, known as the ‘father of value investing’, and has authored a wildly successful book on value investing himself called ‘Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor’. He believes in buying assets that are trading below their intrinsic market value, and buying them at a margin of safety for the long-haul. The billionaire has a knack for spotting equities trading at a discount, and has been likened to ‘Oracle of Omaha’ Warren Buffett over the years due to his investment strategy, earning him the moniker ‘Oracle of Boston’.

Let’s Go ‘Value-Hunting’

In an annual letter written to investors in January, of which Business Insider attained a copy, Seth Klarman noted that the market was facing significant threats from burgeoning inflation and rising interest rates. He warned of an incoming crash, stating that the market was characterized by “stretched valuations and deep complacency.” Klarman also informed his investors that Baupost had purchased hedges to protect itself and possibly gain within the current uncertain macro environment. A disjointed market with such peculiar ups-and-downs present value investors a perfect opportunity to go value-hunting, according to Klarman, who sees commercial real estate as a viable investment. He also denounced the idea that Baupost would try to make easy money by betting on the “hottest high-flyers” of the day, rather he underlined a broader investment horizon for his stock picks that ranged from three to five years, not “next week or next quarter.”

Financial Experiment Gone Wrong

The Baupost Group CEO recently spoke to his alma-mater Harvard Business School and discussed a range of themes during a 70-minute webinar. He noted that the Fed doesn’t seem to know what it is doing, and present circumstances are akin to everybody being in a giant financial experiment that seems to be going wrong. He thinks that interest rates are rising as they should, because they had been kept artificially low for a long time. Klarman also contended that the US dollar is here to stay, and competition from the Chinese yuan, Swiss franc, Japanese yen and Euro presents no threat to its status as the global reserve currency.

Seth Klarman also talked in length about the Russian “war of aggression” against Ukraine, and berated Putin for an unnecessary war he has seemingly boxed his military into. The billionaire shared his views on the vast divide in American society, which in his view was beyond the social, economic, and political fractures of society, and stands exacerbated by a changing job market, growing technological divide, and the fact that everyone has a different version of reality due to the democratization of media, or rather the personalization of news.

Seth Klarman of Baupost Group

The current economic climate is fraught with many uncertainties and challenges, but investors can find comfort in defensive stocks which offer protection from the worst throes of the market. These stocks usually belong to sectors such as utilities, consumer staples, and healthcare; given that they enjoy strong consumer demand and robust earnings no matter what the economic situation. These companies also often pay dividends, and perform better than the market during a recession. Some examples of defensive stocks include Johnson & Johnson (NYSE:JNJ), The Coca-Cola Company (NYSE:KO), and The Procter & Gamble Company (NYSE:PG). In this article, we’ll focus on defensive stocks to buy according to Seth Klarman.

Our Methodology

6 Defensive Stocks To Buy in 2022 According to Seth Klarman

Percentage of Baupost Group’s 13F portfolio: 0.03%

Value of Baupost Group’s Stake: $3.46 million

Number of Hedge Fund Holders: 31

Noble Corporation (NYSE:NE) kicks off the list of defensive stocks to buy according to Seth Klarman. It provides offshore drilling services to the oil and gas companies operating in a variety of terrains around the world. The company has a 20-strong fleet of offshore drilling units, which includes 12 floaters and 8 jackups. Because it is positioned at the heart of the global energy markets, with drilling contracts in the Americas, Europe and Australia, Noble Corporation (NYSE:NE) has rallied 27.24% in the last 12 months, and 20.28% in the year so far as of June 17.

Investors were eager on the company in the first quarter of 2022, where 31 hedge funds owned positions worth $621.7 million, as compared to 24 hedge funds with nearly $374 million worth of stakes a quarter earlier. Seth Klarman’s Baupost Group, in the first quarter, owned approximately 105,000 shares of Noble Corporation (NYSE:NE) with a price tag of $3.46 million.

At the start of June, BTIG analyst Gregory Lewis upgraded Noble Corporation (NYSE:NE) to ‘Buy’ from ‘Neutral’ with a $60 price target. Lewis noted that a recovery in the offshore drilling industry continues to gain momentum, and that NE stock has gained 42% since announcing its merger with offshore drilling company Maersk Drilling in November 2021.

For Q1 2022, Noble Corporation’s (NYSE:NE) revenue of $210.2 million showed a boost of 127.44% in comparison to the year ago quarter, but fell short of analysts’ expectations by $25.9 million. EPS of -$0.12 was also recorded below market estimates by $0.20. 

Like Johnson & Johnson (NYSE:JNJ), The Coca-Cola Company (NYSE:KO), and The Procter & Gamble Company (NYSE:PG), Noble Corporation (NYSE:NE) is a noteworthy defensive stock to buy now.

5. BellRing Brands, Inc. (NYSE:BRBR)

Percentage of Baupost Group’s 13F portfolio: 0.11%

Value of Baupost Group’s Stake: $11.06 million

Number of Hedge Fund Holders: 29

BellRing Brands, Inc. (NYSE:BRBR) deals in the provision of sports nutrition products through its brands Premier Protein, PowerBar, and Dymatize. These include ready-to-drink protein shakes, protein powders, and nutrition bars for athletes. It was previously a business unit of consumer packaged goods company Post Holdings, Inc. (NYSE:POST), another defensive stock in Seth Klarman’s Q1 portfolio.

On May 9, Mizuho analyst John Baumgartner added BellRing Brands, Inc. (NYSE:BRBR) to the firm’s list of top stock picks, noting that it presented one of the rare positive stories for investors in the ongoing market slowdown. He gave the firm an unchanged ‘Buy’ rating and increased the price target to $33 from $30. On the same day, JPMorgan analyst Ken Goldman added BellRing Brands, Inc. (NYSE:BRBR) to the firm’s ‘Analyst Focus List’, noting that the market doesn’t fully appreciate how quickly BellRing’s sales should grow over the next couple years, and thinks that shares are priced attractively given the company’s strong fundamentals. BellRing Brands (NYSE:BRBR) recently announced the launch of a $50 million share repurchase program, with buybacks set to take place within the next two years.

For the first quarter, BellRing Brands, Inc. (NYSE:BRBR) reported an EPS of $0.23, exceeding analysts’ estimates by $0.07. Quarterly revenue of $315.20 million also featured above market forecasts by $7.75 million.

Seth Klarman owned a $11 million position in BellRing Brands, Inc. (NYSE:BRBR) at the end of the first quarter of 2022, consisting of nearly 480,000 shares. Overall, hedge fund sentiment was positive on BRBR stock, with 29 hedge funds reporting ownership of stakes, as compared to 22 hedge funds a quarter earlier.

4. Trilogy Metals Inc. (NYSE:TMQ)

Trilogy Metals Inc. (NYSE:TMQ) is up next on the list of defensive stocks to buy according to Seth Klarman. It operates as a base metals exploration firm, with interests in copper, gold, zinc, silver and other minerals. The Vancouver-based company was previously known as NovaCopper Inc. until it changed its name in 2016. Trilogy Metals Inc. (NYSE:TMQ) owns and develops the Upper Kobuk Mineral Projects in Alaska’s Ambler Mining District.

The firm has suffered in recent months, after the U.S. Department of the Interior filed a motion to remand the final Environmental Impact Statement and suspend the right-of-way permit for the Ambler Access project, after concerns arose regarding the project’s environmental impact. The proposed 211-mile, controlled industrial access road would provide access to the Ambler Mining District in northwestern Alaska, where TMQ holds its primary mining interests. Although this development has raised concerns regarding the project’s completion, Trilogy Metals Inc. (NYSE:TMQ) remains a high risk/reward stock given it has billions of dollars in estimate reserves and a potential change in US administration could put the project back on track. On June 13, National Bank analyst Rabi Nizami reiterated a ‘Sector Perform’ rating on Trilogy Metals Inc. (NYSE:TMQ) shares, and lowered the price target to C$1.75 from C$2.50.

As of the end of the first quarter of 2022, 7 hedge funds reported ownership of stakes in Trilogy Metals Inc. (NYSE:TMQ) with a combined value of $30.45 million. In comparison, 8 hedge funds owned aggregate positions $50.9 million in the company a quarter earlier. Baupost Group’s stake in TMQ at the close of the first quarter stood at 11.12 million shares with a price tag of $11.68 million, representing 0.12% of its total portfolio.

Trilogy Metals Inc. (NYSE:TMQ) is a good defensive stock for investors in 2022, along with names such as Johnson & Johnson (NYSE:JNJ), The Coca-Cola Company (NYSE:KO) and The Procter & Gamble Company (NYSE:PG).

3. Post Holdings, Inc. (NYSE:POST)

Percentage of Baupost Group’s 13F portfolio: 0.28%

Value of Baupost Group’s Stake: $26.2 million

Number of Hedge Fund Holders: 36

Post Holdings, Inc. (NYSE:POST) is a consumer packaged goods company which sells refrigerated, center-of-the-store, food ingredients, and nutrition food products through a range of brands. Despite the recent market sell-off, POST ranks among a number of food retail brands showing strong performance as investors rotate towards defensive stocks. As of June 17, Post Holdings, Inc. (NYSE:POST) has gained 9.53% in the last 6 months, while the S&P500 has slumped nearly 21% over the same period.

On May 9, Piper Sandler analyst Michael Lavery raised the firm’s price target on Post Holdings, Inc. (NYSE:POST) to $96 from $84 and maintained an ‘Overweight’ rating on the company shares. He retained a bullish view on the shares and updated his model to reflect a faster recovery in Foodservice margins, driving his FY2022 EBITDA estimate to the high-end guidance. In June, the company announced that it would invest $110 million to expand its cereal production capacity at its Nevada facility, in order to meet consumer demand, solve capacity constraints, and boost local production for West Coast customers.

Heartland Advisors, an investment firm, talked about the history and performance of Post Holdings, Inc. (NYSE:POST) in its Q1 2021 investor letter. Here’s what it said:

“The run up in equity prices over the past several months has narrowed the pool of attractively valued businesses. Economically sensitive areas of the market, in particular, have seen valuations stretched—but the impact of investor exuberance is evident in share prices of companies throughout the broader market. In response, we continue to focus on finding and owning companies that are poised to succeed against a variety of backdrops or those that are priced at significant discounts to peers regardless of the sector or industry. Recent addition Post Holdings, Inc. (POST) is an example of the type of business we’ve found attractive.

Post manufactures and markets food products through five business lines including a breakfast cereals unit, a food service division, refrigerated retail products, and active nutrition. Shares of the company came under pressure due to the severe impact the COVID-19 economic shutdown had on its food service segment.

Additionally, investors were wary of the company’s use of debt given the uncertainty surrounding how long the economic pullback would last. The bear case against the stock, in our view, is overblown.

In recent years, Post has transformed itself into a higher-growth packaged food enterprise with a diversified portfolio that, taken as a whole, possesses superior growth and free cash flow characteristics vs. its peers. Despite this, shares sell at a meaningful discount to the peer group based on enterprise value/earnings before interest taxes depreciation and amortization, as well as our estimates of the company’s intrinsic value. As the economy returns to normal, Post’s food service line should rebound, and we believe investors will gain a greater appreciation of the company and its stock.”

Raymond James analyst John Ransom on June 17 reiterated a ‘Strong Buy’ rating on Encompass Health Corporation (NYSE:EHC) shares, and revised the price target to $70 from $85. The company recently provided separate guidance for both its segments, ahead of the planned spinoff of its ‘Enhabit’ home health and hospice segment on July 1, which will form an independent company under the ticker EHAB. The analyst noted that the company’s updated 2022 EBITDA guidance came in around $17 million lower than his estimates on an adjusted basis.

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