8 Interesting Stocks in Seth Klarman’s 2022 Portfolio

In this article, we discuss the 8 interesting stocks in Seth Klarman’s 2022 portfolio.

Value investor Seth Klarman is one of the most successful money-managers on Wall Street. His hedge fund Baupost Group was founded in 1982 with $27 million in startup capital, and stands at $9.3 billion in assets under management (AUM) as of the first quarter of 2022. Klarman follows the ‘value investing’ philosophy of Benjamin Graham, which consists of buying undervalued assets and holding them until they turn profitable. Since its inception, Klarman’s Baupost Group has posted an average annual return of more than 20% to its clients.

Klarman’s Best Friend: Market Volatility

In a letter to investors penned at the start of 2022, Klarman noted that the market presents a plethora of gnawing issues that many investors were sleeping on. He summarized it as such:

“We see today’s market as characterized by stretched valuations, deep complacency, and a host of looming risks.”

The investor warned that inflation, which recently reached a 41-year high in May, and rising interest rates pose a substantial threat to financial markets. He noted that investors have become complacent, with the buying trend of the last decade or so having lured many investors into making speculative bets which will blowback soon enough. Commenting on the market volatility which marked the start of 2022 and still persists to this day, Klarman called it a “value investor’s best friend,” given how the ebbs and flows of the market create opportunities for value investors with an eye for undervalued stocks.

Seth Klarman of Baupost Group

As of the end of the first quarter of 2022, Seth Klarman’s portfolio contains big names such as Alphabet Inc. (NASDAQ:GOOG), Meta Platforms, Inc. (NASDAQ:FB), and Intel Corporation (NASDAQ:INTC), but in this article, we’ll focus on the investor’s most interesting and relatively unsung stock picks.

Our Methodology

Interesting Stocks in Seth Klarman’s 2022 Portfolio

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

Value of Baupost Group’s Stake: $3.46 million

Number of Hedge Fund Holders: 31

First up is Noble Corporation (NYSE:NE), a Texas-based company which provides contract drilling services to the oil and gas industry around the world through its fleet of offshore drilling units. With rising commodity prices turning the market’s attention towards the energy sector, Noble Corporation has grown 31.67% in the last 12 months as of June 13.

According to regulatory filings for the first quarter, Seth Klarman owned roughly 105,000 shares of Noble Corporation with a price tag of $3.46 million, which represented 0.03% of his total portfolio. Overall, investors were bullish on the company, as 31 hedge funds were long on the company shares at the end of March, as compared to 24 hedge funds in the previous quarter.

On June 1, BTIG analyst Gregory Lewis upgraded Noble Corporation to ‘Buy’ from ‘Neutral’, with a price target of $60. The stock has gained 42% since announcing its merger with offshore drilling company Maersk Drilling in November 2021, according to the analyst, who notes that a recovery in the offshore drilling industry continues to gain momentum.

For the first quarter, Noble Corporation missed EPS estimates by $0.20. Revenue of $210.2 million for the quarter also missed analysts’ forecasts by $25.9 million, but showed year-on-year growth of 127.44%.

Along with Alphabet Inc., Meta Platforms, Inc., and Intel Corporation, Noble Corporation is one of the most noteworthy stocks to buy now.

Trilogy Metals Inc. (NYSE:TMQ) is a base metals exploration firm which is developing the Upper Kobuk Mineral Projects in Alaska’s Ambler Mining District. It mines and develops copper, zinc, gold, silver, and other minerals. The firm is headquartered in Vancouver, Canada, and was known as NovaCopper Inc. up until 2016.

With 11.12 million shares worth $11.68 million, Trilogy Metals Inc. represented 0.12% of Baupost Group’s total Q1 portfolio. In total, 7 hedge funds reported bullish bets on the company shares at the end of the first quarter, with a combined value of $30.45 million. This is down from 8 hedge funds a quarter earlier.

On June 13, National Bank analyst Rabi Nizami lowered the firm’s price target on Trilogy Metals Inc. to C$1.75 from C$2.50 and maintained a ‘Sector Perform’ rating on the shares. In the last 12 months, TMQ shares have shed 69.42% 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, a proposed 211-mile, controlled industrial access road that would provide access to the Ambler Mining District in northwestern Alaska. This increases uncertainty around the project’s completion, although there are hopes it could kickstart again after a change in the US administration.

Joby Aviation, Inc. (NYSE:JOBY) is the market leader in eVTOL (electric vertical take-off and landing) technology, which aims to produce noise-less electric aircrafts which can be used to provide ride-sharing taxi services to clients. The firm recently received the FAA (Federal Aviation Administration) Part 135 certificate, putting it on track to start commercial taxi operations by 2024.  Joby Aviation, Inc. CEO JoeBen Bevirt recently featured in CBS’s hit show ’60 Minutes’ with Anderson Cooper, talking about the firm’s groundbreaking technology and the future it holds.

In April, Cantor Fitzgerald analyst Andres Sheppard initiated coverage of Joby Aviation, Inc. with an ‘Overweight’ rating and a $10 price target. The company is competing to be among the first-to-market in air taxis and the analyst sees this as “an important advantage” which would help the firm capture market share quickly. Sheppard also noted that the company expects to price its flights at an “affordable” rate of $3-$4 per passenger mile.

30 hedge funds were bullish on Joby Aviation, Inc. at the end of the first quarter, with aggregate positions worth $79.46 million. This shows a positive trend from the previous quarter where 23 hedge funds were stakeholders in the firm. Seth Klarman’s Baupost Group owned 1.96 million shares of Joby Aviation, Inc. in the first quarter, worth $13.02 million and representing 0.14% of its total portfolio.

Archaea Energy Inc. (NYSE:LFG) is a renewable energy company which develops renewable natural gas by processing waste emissions from landfills. With the growing demand for energy around the globe, Archaea Energy Inc. stands as a unique play on the energy sector which is well-positioned to grow in the coming years.

3.12 million shares of Archaea Energy Inc. were reported in the Q1 portfolio of Baupost Group, with a price tag of $65.5 million and taking up 0.7% of the fund’s total portfolio. Investors were seen loading up on Archaea Energy Inc. stock at the end of the first quarter, where 32 hedge funds owned positions in the company, as compared to 26 hedge funds a quarter ago.

Stifel analyst Derrick Whitfield in March initiated coverage of Archaea Energy Inc. with a ‘Buy’ rating and a price target of $37, and placed the stock in Stifel’s Select List. He sees the company offering investors exposure and the “best vehicle to express a bullish view” on low-cost sources of renewable natural gas (RNG) with minimal financing risks. Whitfield cites the firm’s operational focus on landfill gas and its emphasis on marketing to voluntary/non-transport customers. As of June 13, shares of Archaea Energy Inc. have surged 18.51% in the last 12 months.

For the quarter ending March, Archaea Energy Inc. posted an EPS of $0.02, falling short of analysts’ expectations by $0.04. Quarterly revenue stood at $56.9 million, also below estimates by $8.9 million.

3. Encompass Health Corporation (NYSE:EHC)

Percentage of Baupost Group’s 13F portfolio: 2.29%

Value of Baupost Group’s Stake: $213.33 million

Number of Hedge Fund Holders: 48

Encompass Health Corporation (NYSE:EHC) deals in the provision of post-acute healthcare services through its segments: Inpatient Rehabilitation, and Home Health and Hospice. Baupost Group increased its stake in the company by 319% in the first quarter, standing at 3 million shares worth $213.3 million. In contrast, the fund held 716,000 shares of Encompass Health Corporation a quarter earlier.

On April 7, Truist analyst David MacDonald reiterated a ‘Buy’ rating on Encompass Health Corporation shares, and raised the price target to $85 from $78. He maintains a positive stance on the underlying demand drivers and attractive tailwinds for the healthcare services industry, with the dissipating effects of Covid helping alleviate labor pressures and driving robust cash flows.

For Q1 2022, Encompass Health Corporation disclosed earnings per share of $0.97, above estimates by $0.05. The company recorded a revenue of $1.33 billion for the quarter, exceeding market estimates by $8.68 million. As of June 13, the company offers a 1.99% dividend yield to shareholders, with a dividend-paying history stretching back to 2013.

Heartland Advisors highlighted several stocks in its Q4 2021 investor letter, and Encompass Health Corporation was one of them. The fund said:

“COVID complications. Shares of many Health Care companies lagged as the continuing threat of COVID-19 dampened demand for elective medical procedures and health care providers struggled to maintain adequate staffing in the face of burnout and resistance to vaccine mandates. The Strategy’s holdings in the sector trailed the benchmark average, and the group contained a key detractor, Encompass Health Corporation (EHC).

Encompass provides inpatient rehabilitation services as well as home-based health and hospice care. Both businesses enjoy a competitive advantage over many of their peers and, we believe, are well positioned to grow organically, and acquire smaller competitors that could further economies of scale.

A labor shortage has taken a toll on sales and profit margins at Encompass as the company struggles to fill positions in a challenging environment for nursing wages and availability. Revenues have also been hurt by a slowdown in elective surgeries performed, which results in a smaller pool of patients in need of rehabilitation services.

When we took a stake in Encompass late in the summer of 2020, we recognized that COVID-related headwinds could endure longer than anticipated. However, the team believes the current challenges will eventually fade as enhanced nurse recruiting outreach helps mitigate staffing pressures while COVID-19 containment and treatment efforts gain traction. With shares producing an 8% free cash flow yield and trading at just 9x 2022 enterprise value/earnings before interest, taxes, depreciation, and amortization, we believe our patience will be rewarded.”

Percentage of Baupost Group’s 13F portfolio: 3.12%

Value of Baupost Group’s Stake: $290.77 million

Number of Hedge Fund Holders: 49

Willis Towers Watson Public Limited Company (NASDAQ:WTW) is a London-based financial services company which operates through its segments: Health, Wealth & Career, and Risk & Broking.

At the end of May, Willis Towers Watson Public Limited Company approved a $1 billion increase in its share buyback program, which will be in addition to the nearly $1.3 billion remaining on the current open-ended repurchase authority. On May 19, Raymond James analyst C. Gregory Peters removed Willis Towers Watson Public Limited Company from the firm’s “Analyst Current Favorites” list, but maintained a ‘Strong Buy’ rating on the shares with a $270 price target.

For the first quarter, Willis Towers Watson Public Limited Company posted a revenue of $2.16 billion, underperforming estimates by $74.21 million. However, EPS of $2.66 came in above Street forecasts by $0.16. 

According to regulatory filings for the first quarter, Seth Klarman owned a $290.8 million stake in Willis Towers Watson Public Limited Company consisting of 1.23 million shares. This took up 3.12% of the fund’s overall portfolio. The firm’s largest Q1 shareholder was First Eagle Investment Management with a $1.13 billion stake.

Out of all the hedge funds tracked by Insider Monkey, 49 reported ownership of stakes in Willis Towers Watson Public Limited Company at the end of the first quarter with a collective price tag of $2.18 billion. This is down from 66 hedge funds a quarter earlier.

Here is what Artisan Partners, an investment management firm, had to say about the prospects and valuation of Willis Towers Watson Public Limited Company in its Q4 2021 investor letter:

“During the quarter, we made meaningful new investments in two UK domiciled companies, (one of which is) Willis Towers Watson (WTW). Long-term investors will recognize Willis Towers Watson since it was in the portfolio from 2018 to early 2021. We exited that investment after WTW agreed to merge with Aon. Unfortunately for WTW and Aon, that proposed merger was rejected by the US Department of Justice in July 2021. In fact, there is significant market power in this industry, which is what makes it a great business. That market power is exerted not with the insurance brokers’ corporate customers, but with their suppliers (insurance underwriters). We were surprised at Aon’s attempted merger, and our concerns regarding antitrust approval encouraged us to sell.

WTW operates two businesses: insurance brokerage and HR consulting. Both are market-leading with attractive financial profiles and mostly recurring revenue streams. Despite these strengths, WTW operates with lower margins versus peers. The margin opportunity is most pronounced in the insurance brokerage business. Management has slowly increased the insurance brokerage margin over time, but a large gap remains with best-in-class peers like Marsh & McLennan and AJ Gallagher. Management presented a plan to increase the insurance brokerage business’s margins 5% by year-end 2024. This plan follows the outline other insurance brokers have previously used to increase their margins—giving us confidence the targets are achievable.

The merger’s demise brought a new and experienced CEO, a new CFO and a refreshed shareholder-aligned board of directors. In addition, the merger’s cancellation transformed the company’s financial
position. As part of the agreement, Aon paid WTW a $1 billion “break fee.” WTW also sold a re-insurance brokerage business for $3.25 billion along with the potential to earn $750 million through an earnout agreement. With the proceeds, WTW expects to repurchase approximately $4 billion of stock between the second half of 2021 and the end of 2022. With existing cash on hand and cash generation over the next three years, we estimate the company can return another $6 billion to shareholders through dividends and share repurchases representing over 20% of today’s market capitalization. We forecast earnings of approximately $20 per share in 2024—a price to earnings (P/E) ratio of 11.5X. We believe that valuation significantly undervalues this high-quality business.”

Percentage of Baupost Group’s 13F portfolio: 5.11%

Value of Baupost Group’s Stake: $476.17 million

Number of Hedge Fund Holders: 19

Veritiv Corporation (NYSE:VRTV) is an Atlanta-based B2B provider of packaging, publishing and hygiene products, with approximately 125 distribution centers spread across the United States, Mexico and Canada. Seth Klarman, according to his Q1 portfolio, owned a $476 million stake in Veritiv Corporation consisting of 3.56 million shares.

As of June 13, Veritiv Corporation has seen its shares climb 115.26% in the last 12 months, and 7.76% in the year so far. The firm enjoys strong pricing power for its products/services, and looks set to grow its revenue given its dominant position in the product packaging industry.

For the quarter ending March, Veritiv Corporation’s (NYSE:VRTV) revenue was recorded at $1.86 billion, up 19.16% from the year-ago quarter and above analysts’ forecasts by $86.7 million.

Out of all the hedge funds tracked by Insider Monkey, 19 reported bullish bets on Veritiv Corporation at the end of the first quarter, with aggregate positions worth $549.6 million. This is in comparison to 20 hedge funds a quarter earlier with $511.7 million worth of stakes in the company.

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