Seth Klarman (Trades, Portfolio) runs the $5 billion investment partnership The Baupost Group. Founded in 1983, The Baupost Group has averaged returns of nearly 20% annually since their inception. Seth Klarman (Trades, Portfolio) invests in a wide array of investments ranging from fairly traditional value stocks to more esoteric investments like distressed debt, liquidations, and foreign equities or bonds, but he does go heavy in a few areas with only 27 positions with his top three holdings making up nearly 50% of his portfolio.
Let’s see how the top three stack up.
Cheniere Energy Inc (LNG, Financial) – Klarman owns 13,807,230 shares
Klarman started buying this in the $55 range during the first quarter of last year and paid $5 more than the current trading price in Q3 2014. From a business standpoint, this company is hard to invest in. On paper, it looks horrible and complex. This is not a two-foot hurdle.
Cheniere is a Houston-based energy company engaged in liquid natural gas business. It owns various properties and two separate publicly held companies. LNG is developing up to nine liquefaction trains with aggregate design production capacity of 40.5 mtpa, which by my calculations would get its revenue into the billions, but nowhere near justification to pay $17 billion for it today.
Current financials
- $1.75 billion in cash
- $9.83 billion in debt
- $269 million in revenue
- $547 million net loss
- $17.8 billion market cap
Something is missing here. Cheniere Energy will benefit by being the first to start exporting LNG from America and competitors may be forced to adjust to Cheniere’s effects on the gas prices, but what’s the profit going to be on these endeavors? Baupost has a billion dollars in this company. It doesn’t seem like a value investment on the surface.
Viasat Inc (VSAT, Financial) – Klarman owns 11,533,137 shares
Klarman and Baupost has steadily build a big position in the company since 2008, when he started buying at $20.21 per share. The company develops broadband technology for use in satellites, which has helped it grow revenues from $346 million to over $1.3 billion in the last decade with 25% gross margins.
Still, it’s hard to see this one as a value play. Return on Equity is a dismal 2.95% and with total debt on the books of $819 million, the company needs to start earning 10x the profit it did last year –Â immediately.
Current financials
- $97.64 million in cash
- $819.9 million in debt
- $1.36 billion in revenue
- $29.3 million net profit
- $2.88 billion market cap
I can never tell when it comes to these investments, whether they are demanding new investors because of the guru or because of the underlying economics. It seems that investors are always willing to pay more for something sexy, growing, and guru owned. We’ll see where it trades, because even if it takes years to produce solid profit gains, investors may continue to hold it at a 100x valuation. This one is hard to value, which give Klarman an edge over the average investor.
Micron Technology Inc (MU, Financial) – Klarman owns 19,706,035 shares
This is another one that brings Klarman’s “value investor” title into question, but at least its current valuation can be defended. Trading at 9x earnings, Micron is a leader in the semiconductor industry with 35 years of work in memory and storage technology –Â two vital parts of society today and into the future. Klarman bought in Q2 2013 at $14.33 and has been divesting his stake slowly, so this one may be on the way out Baupost, despite the low multiple.
Current financials
- $4.48 billion in cash
- $6.77 billion in debt
- $16.95 billion in revenue
- $3.89 billion net profit
- $30.15 billion market cap
Consistency is not a word that I would use with Micron, but as an investor, you don’t get paid based on what has already happened. If Klarman sells out of this holding, it may be a mistake if the company continues to produce solid earnings.
Conclusion
I believe it's important to know what baseline return on investment you should achieve from a particular equity and then, through analysis, if it meets or exceeds that baseline return –Â invest. My baseline is 15% annualized or 100% every five years. A five-year time horizon is always good to have considering the booms and busts our economy suffers –Â seemingly more regularly now.
None of these stocks meet that guideline based on earnings or book value growth potential, and as they relate to the price per share. Consistent earnings and a predictable future are key ingredients in a sound investment operation (as per Graham + Buffett) and I'm not convinced any of these meet those requirements. Seth may produce solid returns versus the S&P 500 with them, but let’s revisit this post in a year and see.
Current Prices (as of May 6, 2015 close)
- LNG –Â $75.26
- VSAT – $60.45
- MU – $27.99
