Seth Klarman (Trades, Portfolio), a renowned value investor at the Baupost Group, has a dire forecast for markets. In his 2013 annual letter, he said that he sees a “Truman Show” market which is precarious even though it doesn’t look that bad. He names as positive factors: elevated but not extreme P/E ratios, shrinking deficits, mending consumer balance sheets, recovering U.S. housing, nearing energy independence, low bond yields and low interest rates.
He also sees negative trends looming: the consequences of near-zero short-term interest rates, Fed tapering, sizable deficits propping up the consumer, and a market higher only three times in the past based on Robert Schiller’s cyclically adjusted P/E ratio – prior to the past three market crashes.
Consequently, Klarman holds 40% of his portfolio in cash and returned $4 billion to clients at year-end. In 2008, Klarman’s bottom-up stocking picking approach and cautious positioning helped him withstand the worst of the financial crisis, losing slightly more than 7%.
Though Klarman is an individual stock picker, at this point he has found most of his holdings within the technology sector, which accounts for 54.6% of his portfolio. He holds 19 stocks in total, valued at $3.5 billion.
In the fourth quarter, he added to one technology positions, Viasat Inc. (VSAT); kept one unchanged, Chipmos Technologies Bermuda Ltd. (IMOS); and reduced his largest position Micron Technology Inc. (MU) and Rovi Corp. (ROVI). He also sold out of two further tech holdings: Ituran Location and Control Ltd. (ITRN) and Oracle Corp. (ORCL).
Viasat Inc. (VSAT)
Klarman has a 24.49% interest in Viasat, a high-conviction stock he has been purchasing over numerous quarters beginning in the third of 2009. His largest purchases occurred in 2009 and 2010, at average quarterly prices ranging from $25.45 to $30.79 per share. But he continued to add to the position as recently as the fourth quarter of 2013, buying 129,200 shares even as the price traveled to $63 per share on average. Klarman has a 135% average gain on his buy price for Viasat, as of Tuesday’s price around $73.75.
Viasat is a communications, Internet and network company serving the general public, governments, enterprises and the military. It has a $3.39 billion market cap, and its share price increased 295% over the past five years, currently trading at its historical high price.
The company’s stock saw a prominent 45% jump in the first two weeks of May 2013, around the time it announced record revenues and awards for fiscal 2013, with top-line growth across all its business segments.
Growth has continued at the company. For the third quarter of fiscal 2014, it announced a 16% year-over-year increase in revenues to $332.6 million, 17% year-over-year EBITDA growth to a record $56.7 billion, and a loss of $0.13 per share on a diluted GAAP basis, compared to a net loss of $0.47 per share a year prior.
Part of the company’s continued growth derives from its ability to produce disruptive technologies, such as in-flight Wi-Fi with JetBlue using its satellite networks and technologies which enable greater speed, lower cost and more passengers reached. It also received more than $100 million in contract awards from the government for mobile satellite broadband services, networking and tactical sitcom networking access during the year.
The company has a return on assets and return on equity at negative 2.29% and 4.56%, respectively, beginning in 2013. It also has five-year per-share growth rates of 5.2% for revenue, 2.6% for EBITA, 11.9% for free cash flow and 6.2% for book value.
ViaSat’s 10-year revenue and earnings history:
ViaSat trades with a P/B ratio of 3.6 and P/S of 2.5.
Chipmos Technologies Bermuda (IMOS)
The only technology position Klarman did not alter in the fourth quarter was Chipmos Technologies Bermuda, a company of the semiconductor industry. He sat on 3,283,235 shares which he acquired over the second and third quarters of 2013, at average prices ranging from $16 to $17 per share. His approximate gain from the average buy price is 38%, as of today’s current trading price around $22.81.
Klarman controls 9.76% of Chipmos’ shares, though the holding accounts for 1.8% of his portfolio. Like ViaSat, this company has also soared to a five-year peak share price, after gaining 1,490% over the past five years. ChipMOS is a holding company providing testing and assembly services for LCD and flat-panel display driver semiconductors, and memory products in Taiwan and China.
The company’s stock continued its advance this month when it reported fourth quarter results at the high end of its guidance. ChipMOS reported a 0.5% increase in revenue to US$163.2 million, and net income of US$5.7 million, or US$0.19 per diluted common shares, compared to U.S$4.5 million, or US$0.15 per diluted common share, in the fourth quarter of 2012.
The company’s gross margin also met the high-end of its forecast range, increasing to 17.8% from 12.8%, with free cash flow of $21.4 million. ChipMOS ended the year 2013 with US$448.3 million in cash and cash equivalents, and having reduced net debt by $211 million in 2013.
ChipMOS’ 10-year revenue and earnings history:
For the first quarter, ChipMOS is expecting strong demand in both LCD drivers and memory for mobile and UHD TVs to result in flat or low single-digit increases in revenue sequentially and gross margins in the range of 17% and 21%. The stock of its subsidiary, ChipMOS Taiwan, will also potentially complete a Taiwan Stock Exchange IPO process early in the second quarter of 2014.