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Seth Klarman's Top 5 Picks: VSAT, THRX, NWS, CSE, ALR

March 10, 2011 | About:
charlie.cliff

charlie.cliff

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Seth Klarman is the founder and president of the Baupost Group, a Boston-based private investment partnership, and the author of several books on value investing. Klarman graduated from Cornell University and Harvard Business School. In 1991, Klarman authored Margin of Safety, Risk Averse Investing Strategies for the Thoughtful Investor. Klarman founded the Baupost Group in 1982, before which he worked for Max Heine and Michael Price of the Mutual Shares fund. Despite his unconventional strategies, he has consistently achieved high returns. He is a very conservative investor, and often holds significant amounts of cash in his investment portfolios, sometimes in excess of 50% of the total. He often makes unusual investments, buying unpopular assets while they are undervalued, using complex derivatives, and buying put options.

Baupost has returned 19 percent a year since 1983, rather than the 11 percent for the Standard & Poor's 500-stock index. His record helped Klarman almost double Baupost's assets, to $22 billion, over the past two years—a period when the hedge fund industry was seeing withdrawals.

Klarman tends to hold less of his assets in stocks than his fellow hedge fund investors. Klarman has never been afraid to hold large amounts of cash and wait for undervalued stocks to present fresh opportunities: “We come in with a view that this particular asset or security is trading for less than it’s worth and we want to buy it” (Absolute Return Alpha). Klarman’s philosophy focuses on taking advantage of opportunities when they are presented rather than leveraging the fund’s portfolio and assets. Klarman has also voiced concerns of future inflation, fearing that in the current market “we'll have another 10 years of zero returns”. Klarman’s conservative fiscal approach is reflected in his concerns for the current state of the market: "a Hostess Twinkie snack cake because everything is being manipulated by the government and appears artificial." Betting against the market, Klarman has purchased far out-of-the-money puts on bonds to hedge the risk of inflation while also holding 30 percent of his holdings in cash. These long term investments reflect Klarman’s conservative fiscal policy.

Klarman addressed these concerns in his most recent annual letter to his investors: “the government's fiscal and monetary experiments may go awry, resulting in runaway inflation or currency collapse”. Klarman propones minimal government involvement and is afraid of effects of reckless economic policy.

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Top Five Holdings in 2010 Ticker Percent Composition Number of Shares
VSAT ViaSat Inc 25.72 10,051,492
THRX Theravance Inc. 18.78 13,000,000
NWS News Corp 15.98 19,050,000
CSE CapitolSource Inc. 6.55 16,000,000
ALR Alere Inc. 6.54 3,100,000


ViaSat (VSAT)

ViaSat, Inc. is a provider of advanced satellite and wireless communications and secure networking systems, products and services. It operates in three segments: government systems, commercial networks, satellite services. Following the acquisition of WildBlue Holding, Inc., on December 15, 2009, the Company operates as a wholesale and retail provider of satellite broadband Internet services in the United States.

Their shares trade around $72.89, with a P/E ratio of 19.74 and an EPS of $3.69. In the last quarter of 2010, News Corp. had revenue of $2.2 billion and a net income of $884 million. Klarman added Viasat to his portfolio during the second quarter of 2008 at around $20 per share. The position didn’t change until the third quarter of 2009. By the end of 2009, he had nearly 5 million shares. He kept adding to his position, paying around $30-35 in 2010 and doubling his holdings. Now the stock trades at $44.85 and Klarman made more than 40% in his 2010 investments in VSAT.

Viasat is Klarman’s largest stock holding right now. Gurufocus rated VSAT with the business predictability rank of 1-star.

Theravence (THRX)

Theravance, Inc. is a biopharmaceutical company with a pipeline of internally discovered product candidates. The company is focused on the discovery, development and commercialization of small molecule medicines across a number of therapeutic areas, including respiratory disease, bacterial infections and gastrointestinal motility dysfunction.

Their shares trade around $22.51, with an EPS of -$1.17. In the last quarter of 2010, News Corp. had revenue of $6.94 million and a net income of $-19.3 million. Klarman bought more than 5 million shares of THRX at the beginning of 2008 below $11 per share. Later he increased his position to 10 million, paying around $12-13 per share during 2009. Finally last year he added another 3 million shares at around $13. Today he has 13 million shares and the stock last traded at $24.43. He made nearly $150 million last year from this position.

NewsCorp (NWS)

News Corporation is a global media company, operating in eight segments: Filmed Entertainment, Television, Cable Network Programming, Direct Broadcast Satellite Television, Integrated Marketing Services, Newspapers and Information Services, Book Publishing, and Others. The Company’s conducts activities in the United States, the United Kingdom, Continental Europe, Australia, Asia and Latin America.

Their shares trade around $16.60, with a P/E ratio of 13.96 and an EPS of $1.19. In the last quarter of 2010, News Corp. had revenue of $8.7 billion and a net income of $642 million. News Corp was Klarman’s largest stock holding during 2009. At one point he owned 27.5 million shares trading at $6 during March 2009. Today News Corp’s stock price is $14.68 and Klarman reduced his holdings to 19 million shares. He was probably selling these shares during the fourth quarter since they were trading near $15. Gurufocus rated NWS with the business predictability rank of 1-star.

CapitolSource Inc. (CSE)

CapitalSource Inc. is a commercial lender which, primarily through its wholly owned subsidiary, CapitalSource Bank, provides financial products to small and middle market businesses nationwide and provides depository products and services in southern and central California. It operates as three reportable segments: CapitalSource Bank, Other Commercial Finance, and Healthcare Net Lease.

Their shares trade around $7.55, with an EPS of -$0.44. In the last quarter of 2010, News Corp. had a net income of $5.91 million. Capitalsource has been one of Klarman’s biggest investments in 2009. He bought nearly 30 million shares at a cost of $1.20. Today these shares trade at $7.56.

Alere (ALR)

Alere Inc., formerly Inverness Medical Innovations, Inc., provides diagnostics and health management solutions. The company’s products and services are focused on infectious disease, cardiology, oncology, drugs of abuse and women's health. Its brands range from over-the-counter tests to lab-based diagnostics to integrated home monitoring solutions. The Company has operations in North America, Europe and Middle East, Asia Pacific, and Latin America and Africa.

Their shares trade around $38.15, with an EPS of -$12.94. In the last quarter of 2010, News Corp. had revenue of $578.45 million and a net income of -$1 billion. Since August, this stock has gone up by 33.3% since, and Klarman’s return has been 24.2%.


Rating: 2.9/5 (15 votes)

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