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Seth Klarman’s Top 5 Stock Picks

Seth Klarman is the founder and president of the Baupost Group, a Boston-based private investment firm. Prior to founding Baupost Group with $27 million in 1982, Klarman worked for the Mutual Shares fund, which is now a part of Franklin Templeton Investments. Baupost Group has been generating high returns consistently. It returned around 20% on the average per year since inception. Today, Baupost Group is the 11th largest hedge fund in the world. Klarman is a very conservative investor and generally stays away from stocks, however recently he started building really large positions. Let’s take a closer look at Seth Klarman’s top 5 stock picks and decide whether it makes sense to imitate these stock picks.


News Corp (NWSA): At the end of December, Baupost Group had $268 million invested in class A of NWSA shares and another $194 million in class B of NWSA shares. Overall the fund boosted its NWS stakes by 1% over the fourth quarter. The stock is also quite popular among hedge funds. As of September 30, 2011, there were 57 hedge funds reported to own NWSA in their 13F portfolios. For instance, both Stephen Mandel’s Lone Pine Capital and Eric Mindich’s Eton Park Capital invested over $400 million in the stock at the end of the third quarter.

News Corp was a great stock pick in August when it was trading below $14. Hedge funds pounced on the opportunity created by the hacking scandal. News Corp has a diversified asset portfolio and benefits from the economies of scale. It also has a strong balance sheet with reasonable debt levels. NWSA has a forward P/E ratio of 14 and its EPS is expected to grow at 20% on the average per year in the next five years. Therefore, NWSA’s P/E ratio for 2014 is less than 10, slightly higher than that of Time Warner Inc (TWX) which is expected to grow its EPS by only 12% annually over the next 5 years. We prefer NWSA to TWX even though News Corp has a higher current price multiple. NWSA was also purchased by one insider in February, while TWX does not have any insider purchases over the past year.

Microsoft Corp (MSFT): Klarman is also bullish about MSFT. His Baupost Group had $312 million invested in this position at the end of last year. MSFT is a very popular stock among hedge funds. At the end of the third quarter, there were 94 hedge funds with MSFT positions in their 13F portfolios. For instance, Boykin Curry is the most bullish hedge fund manager about MSFT. His Eagle Capital Management had nearly $500 million invested in MSFT. Ken Fisher, Jean-Marie Eveillard, and David Einhorn were also bullish about MSFT. All their funds had over $350 million invested in this stock at the end of September. We are bullish about MSFT as well. It has a forward P/E ratio of 10.23 and its EPS is expected to grow at 9.16% on the average per year for the next five years. As a result, its P/E ratio for 2014 is 8.6, lower than the market and most of its peers. The main competitors of MSFT include Apple Inc (AAPL), Google Inc (GOOG), and Oracle Corporation (ORCL). Among these three competitors, only AAPL’s P/E ratio for 2014 is lower than that of MSFT. AAPL’s P/E ratio for 2014 is 7.8, while GOOG and ORCL’s 2014 P/E ratios are 8.7 and 8.8 respectively. We actually like all these technology stocks. They are undervalued as a sector and have great potential to generate attractive returns over the next couple of years.

The other big positions in Klarman’s portfolio are Hewlett Packard Co (HPQ), BP Plc (BP), Viaset Inc (VSAT), and Theravance Inc (THRX). Klarman did not change his stakes in VSAT and THRX over the fourth quarter, while he reduced his position in BP by 13% and his HPQ stakes by 10%. At the end of 2011, Baupost Group had $513 million invested in BP and another $483 million invested in HPQ. Though Klarman decreased his position in these two stocks, we still like BP and HPQ. HPQ is very attractive as its P/E ratio for 2014 is only 5.8. The energy company BP is also trading at a discount. Its forward P/E ratio is only 6.76 and it is expected to grow at 4.23% per year in the next five years, which means that its P/E ratio for 2014 is only 6.2. Overall we like Klarman’s top stock picks. They are clearly value stock picks with a lot of margin of safety.