Seth Klarman (Trades, Portfolio) recently released the 13F portfolio updates for The Baupost Group’s second quarter of 2022, which ended on June 30.
The Baupost Group is a hedge fund company founded by Harvard Professor William Poorvu in 1982. Based in Boston, the long-only fund invests in a wide range of securities, from common stock to liquidations and distressed debt. Klarman is the portfolio manager and believes that a solid investing strategy should never ignore risks in the pursuit of absolute returns, which is one of the three pillars of his investing philosophy. The other two are to analyze losses before gains and to forget about macro conditions, focusing only on the investment idea.
Baupost reported three new buys on its latest 13F, the most surprising of which was perhaps New Oriental Education & Technology Group Inc. (EDU, Financial), a fallen Chinese education giant that suffered from government policy change on for-profit education. The other buys were Warner Bros. Discovery Inc. (WBD, Financial) and Amazon.com Inc. (AMZN, Financial).
Investors should be aware 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but the reports can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.
New Oriental Education & Technology
The firm bought 8,000,000 shares of New Oriental Education & Technology Group (EDU, Financial), giving the stock a 2.42% equity portfolio weight at the quarter’s average share price of $13.66.
From highs of nearly $200 reached in early 2021, shares of New Oriental Education have crashed spectacularly on the triple whammy of a regulatory crackdown, the threat of Chinese stocks being delisted from U.S. exchanges and the Chinese government’s restrictions on certain types of tutoring services.
The restrictions on tutoring services in particular have been devastating to New Oriental Education’s business. Extra-curricular for-profit tutoring was the company’s bread and butter, and it thrived in an environment where children spent long hours studying after school to rise above their peers. However, due to the strain on the children’s time and their parent’s wallets, the Chinese government decided to ban homework for children as well as private tutoring for core subjects and tutoring holiday/weekend tutoring for any subjects.
Finding itself suddenly absent its core business, New Oriental Education had to act fast to restructure. While it is still a far cry from its former glory, it has made progress in expanding its overseas test preparation and consulting businesses, domestic tutoring for adults and university students, non-academic tutoring and intelligent learning systems and devices.
Warner Bros. Discovery
Baupost’s top new buy of the quarter was 18,000,000 shares of Warner Bros. Discovery (WBD, Financial). The stock takes up 3.58% of the equity portfolio, and shares traded for $18.65 apiece in the second quarter.
Early in April, Discovery and WarnerMedia officially closed their long-awaited merger deal, combining into one entertainment giant in order to drive value creation and take advantage of business synergies. The newly combined company aims to improve its competitive standing against other television streaming companies.
According to CEO David Zaslov, the company “offers the most differentiated and complete portfolio of content across film, television and streaming.” As a leader in informational television content, Discovery undeniably has a unique product to offer alongside WarnerMedia’s entertainment focus, which helps differentiate it from competitors.
Amazon.com
The firm also acquired a 598,000-share position in Amazon.com Inc. (AMZN, Financial), giving the stock a weight of 0.94%. During the quarter, shares changed hands for around $125.73 apiece.
A leader in U.S. e-commerce and cloud services, Amazon (AMZN, Financial) is one of the most valuable publicly traded companies in the world with a market cap of $1.47 trillion. Its low-margin e-commerce business is struggling with inflation, but the cloud business is still growing strong.
Given Amazon’s dominant market position in both of its main areas of operation, it is rare for it to see a significant drop in its share price, but that is exactly what has happened this year. Amazon stock is now modestly undervalued based on its GF Value chart.
Portfolio overview
When the quarter ended, Baupost’s common stock equity portfolio consisted of shares in 52 stocks valued at a total of $6.74 billion based on the 13F filing. The turnover for the quarter was 10%.
The top holdings were Liberty Global PLC (LBTYK, Financial) with 15.87% of the equity portfolio, Qorvo Inc. (QRVO, Financial) with 9.75% and Viasat Inc. (VSAT, Financial) with 7.40%.
By portfolio weight, the firm was most invested in communication services and technology.
