Billionaire Seth Klarman’s Top 3 Micro-Cap Stock Picks ~ Bellatrix Exploration Ltd (BXE), Kindred Biosciences Inc (KIN) and Alliance One International, Inc. (AOI)

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The world’s 11th largest hedge fund, Seth Klarman’s Baupost Group, recently filed its 13F with the Securities and Exchange Commission for the end of the first quarter. Klarman founded Baupost Group in 1982 along with his Harvard Business School professor Bill Poorvu and other partners. Since its inception, Baupost Group’s three private partnerships have generated 19 percent in average annualized returns. Klarman is classified as one of the most conservative investors on the Street, owing to his investment philosophy of keeping a significant percentage of the fund’s AUM in cash, sometimes as much as 50 percent. With the exception of real estate investments, the fund hardly uses any leverage. As of March 31 of this year, the total equity portfolio of the fund was valued at $5.95 billion, a significant increase from the $5.09 billion that was reported for the period of December 31. Among sectors, the fund currently has the highest exposure to Technology. Although Baupost Group has stakes in some of the best blue-chip companies, we decided to evaluate and analyze the top 3 micro-cap stocks it currently holds:  Bellatrix Exploration Ltd (NYSE:BXE), Kindred Biosciences Inc (NASDAQ:KIN) and Alliance One International, Inc. (NYSE:AOI).


Before we proceed to analyzing the top three micro-cap picks of Baupost Group, let us take a step back and first understand why it’s so crucial for us to evaluate the top holdings of a select group of hedge funds. While in 2012, 2013, and 2014 the S&P 500 ETF (SPY) returned 16%, 32.3% and 13.5% respectively, equity hedge funds overall returned just 2.8%, 11.3% and 1.4% respectively. On the other hand, our small-cap hedge fund strategy, which identifies the top 15 small-cap stocks held by hedge funds, returned 33.2% in 2012, 53.2% in 2013 and 28.2% in 2014, outperforming both the broader market and hedge funds as a whole. In the 32 months since it was launched it has returned over 144%, beating the market by more than 84 percentage points (read the details).

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Bellatrix Exploration Ltd (NYSE:BXE) remained the top micro-cap holding of Baupost Group at the end of the first quarter. After initiating its stake in the fourth quarter, the fund increased its stake in the company by a further 3.73 million shares in the first quarter. However, due to the increase in the overall value of the fund’s equity portfolio, Bellatrix Exploration Ltd (NYSE:BXE) now comprises only 0.89% of that portfolio, compared to the 1.29% that it did as of the previous reporting period. Shares of the Canada-based oil and natural gas exploration and production company have not been performing well in the last few months and are down 67.2% over the last calendar year.  However, in the last three months the shares have appreciated by over 12%. For the quarter ending March 31, the company reported an EPS loss of $0.05, compared to the EPS of $0.08 it reported quarter-over-quarter. Daniel Lewis’ Orange Capital is another prominent hedge fund that as of March 31 owned 28.15 million shares in Bellatrix Exploration Ltd (NYSE:BXE).

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