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Seth Klarman: The Focused Value Investor

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Seth Klarman Stocks Portfolio - Vintage Value Investing

A review of Seth Klarman’s portfolio and his value investing approach.


Klarman’s Margin of Safety

Seth Klarman is the CEO & President of the Boston based Baupost Group, one of the largest and most successful hedge fund groups in the world. His firm managed $30 billion as of December 2016. In the process, he has built a personal fortune of over $1.5 billion.

Klarman, along with Warren Buffett, is regarded as one of the most successful value investors in the world. Apart from his success as a value investor, his other claim to fame is his highly recommended investing bookMargin of Safety’, which he wrote in 1991. Despite the book developing a cult like following, only 5,000 copies were ever published. The result is that copies now sell on eBay and Amazon for around $750, and some copies have apparently sold for $15,000.

Seth Klarman joined the newly formed Baupost Group straight out of business school in 1982. The firm’s funds invest in equities as well as distressed debt and structured products.

Klarman has made several very shrewd moves during his career. One of these came in 2008 when he noticed hedge funds liquidating large positions. He thought that was a sign of a great buying opportunity and went out and raised $4 billion in new capital. While many funds were closing down, he was putting new money to work at what tuned out to be the start of a new bull market.

Like many successful investors, Klarman is a philanthropist – his foundation currently holds $540 million in assets. He donates to science, music and to Israeli causes. He also owns the English language Israeli news site, Time of Israel.


The True Benjamin Graham Disciple

Benjamin Graham is known as the father of value investing and Warren Buffett is probably the most well-known follower of his philosophy. However, Seth Klarman may be a closer follower of the Ben Graham philosophy. One could say that Buffett is more of a business manager than a true value investor, while Klarman is solely focused on the value investing philosophy.

In 2009 Klarman gave a speech to the Ben Graham Centre for Value Investing in Ontario. During that speech, he shared the following points on investing.

  • He said you should look at the probability and magnitude of a potential loss before focussing on the potential gain of an investment.
  • He also suggested focusing on absolute performance rather than relative performance. By doing so investors will be more aware of the possibility that they will lose money. While those focused on relative returns are striving to lose less than others, those focusing on absolute returns are focused on making money and protecting capital.
  • He suggested that investors focus on individual investments rather than top-down, macro investing. Macro investing is very difficult as it involves forecasting economic performance, interest rates, inflation and currency movements – all of which are very difficult to do.

Klarman has also spoken about his philosophy on exiting a position. He likes to buy assets at a discount and then sell them when they appreciate, but before they reach their fair value. In other words, he would rather sell too soon, than risk price weakness just to make the last few percent. Selling early also allows him to buy in again if the price falls.

He does not use leverage, as doing so may force him out of a position he would otherwise be able to ride through a dip. In fact, not using leverage means that at lower levels where a leveraged investor would be forced out of a position, Klarman can add to the position.


Baupost Group’s Latest Form 13F Filing

On November 13, 2017, Klarman’s firm The Baupost Group filed their quarterly Form 13F regulatory filing. I reviewed the 13F filing to get a sneak peek at holdings in Baupost Group’s massive portfolio.

The hedge fund’s stock portfolio totals nearly $8.0 billion according to the latest filing. However, the list value of stock holdings is down -8.2% when compared to the previous quarter.

Quarter-over-Quarter Turnover (QoQ Turnover) measures the level of trading activity in a portfolio. Baupost Group’s QoQ Turnover for the latest quarter was 10.0%, so the firm likely has high conviction in its holdings since it does not trade in and out of a significant percentage of its portfolio each quarter.


Baupost Group’s Largest Holdings

The Ideas section of finbox.io tracks top investors and trending investment themes. You can get the latest data on the holdings discussed below here. The following table summarizes Baupost Group’s Largest Holdings reported in the last filing:

Largest Holdings
Ticker Name Holding ($mil) % Of Portfolio
LNG CHENIERE ENERGY INC 933.5 11.7%
SYF SYNCHRONY FINL 909.6 11.4%
VSAT VIASAT INC 846.3 10.6%
QRVO QORVO INC 636.1 8.0%
AGN ALLERGAN PLC 607.5 7.6%
CLNS COLONY NORTHSTAR INC 601.7 7.5%
FOXA TWENTY FIRST CENTY FOX INC 504.8 6.3%

The seven positions above represent 63.1% of the hedge fund’s total portfolio.


Baupost Group’s 7 Biggest Buys

I also used finbox.io to find Baupost Group’s largest buys last quarter. Here’s the list of biggest buys determined by comparing the last two filings:

Stock He’s Buying
Ticker Name Purchased ($mil) % Of Portfolio
AGN ALLERGAN PLC 109.0 7.6%
MCK MCKESSON CORP 76.8 1.0%
AR ANTERO RES CORP 54.6 6.0%
AMC AMC ENTMT HLDGS INC 52.4 0.7%
CAH CARDINAL HEALTH INC 33.5 2.1%
ABC AMERISOURCEBERGEN CORP 15.6 0.2%
PXD PIONEER NAT RES CO 4.3 0.1%

It was interesting to see Klarman add $109 million to his Allergan position since the stock actually lost more than 15% of its value in Q3. Shares of Allergan have fallen another 15% since September 30th so it will be interesting to see if Klarman continues to add to his position.


Baupost Group’s 5 Biggest Sells

Here’s the list of biggest position reductions determined by comparing the last two filings:

Stock He’s Selling
Ticker Name Sold ($mil) % Of Portfolio
QCOM QUALCOMM INC 288.0 3.3%
DVMT DELL TECHNOLOGIES INC 200.7 3.0%
CAR AVIS BUDGET GROUP 112.8 0.5%
SRC SPIRIT RLTY CAP INC NEW 66.7 0.8%
SRUN SILVER RUN ACQUISITION 45.5 0.3%

Baupost Group’s Recent Price Pullbacks

To find stocks in his portfolio that may be unpopular at the moment and trading at cheap valuations, I ranked his holdings by price pullbacks. The ranking table below lists the 3 stocks in Baupost Group’s portfolio by stock price performance over the last 30 days.

Recent Price Pullbacks
Ticker Name Price 1-mo Ago Current Price % Change 1-mo
FWP FORWARD PHARMA A/S $5.86 $4.21 -28.2%
KERX KERYX BIOPHARMACEUTICALS INC $5.99 $4.72 -21.2%
TMQ TRILOGY METALS INC NEW $1.02 $0.84 -18.1%

Baupost Group’s Fastest Growing Businesses

Revenue growth can a strong signal of product market fit. The table lists 5 stocks in Baupost Group’s portfolio that have strong top line growth.

Fastest Growing
Ticker Name Revenue Growth % Of Portfolio
LNG CHENIERE ENERGY INC 817.0% 11.7%
OREX OREXIGEN THERAPEUTICS INC 128.6% 0.1%
CLNS COLONY NORTHSTAR INC 96.9% 7.5%
CDEV CENTENNIAL RESOURCE DEV INC 64.8% 0.5%
KERX KERYX BIOPHARMACEUTICALS INC 64.1% 2.3%

Baupost Group’s 7 Most Undervalued Holdings

To determine which stocks are trading below their intrinsic value, aka “fair value” I used the finbox.io Fair Value estimates. I also wanted to blend in some indication of which stocks might be ready to make a move up soon because they’re popular with Wall Street analysts.

I calculated an average using the finbox.io fair value upside and analyst upside to create a blended upside which I then used to rank the most undervalued holdings.

Here are the Top 7 stocks based on my calculations:

Most Undervalued
Ticker Name Upside (finbox.io) Upside (Analyst Target) Blend Upside
RUN SUNRUN INC 92.1% 85.7% 88.9%
TMQ TRILOGY METALS INC NEW -28.9% 139.3% 55.2%
ATRA ATARA BIOTHERAPEUTICS INC 10.3% 97.9% 54.1%
AMC AMC ENTMT HLDGS INC 38.1% 37.3% 37.7%
NG NOVAGOLD RES INC -39.4% 105.9% 33.2%
AR ANTERO RES CORP 5.5% 43.6% 24.5%
IMOS CHIPMOS TECHNOLOGIES INC 20.4% 24.5% 22.4%

Most can agree that with thousands of stocks traded on U.S. exchanges, doing thorough research on each one is nearly impossible for smaller investors. Leveraging the resources of the largest hedge funds on Wall Street can be a powerful way to narrow down the list.

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