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Seth Klarman best stock in years

January 17, 2009 | About:

I have been reading Seth Klarman's book Margin of Safety and I must say it is an outstanding book. One of the best I have ever read. He explains his thinking and his strategies with such simplicity and clarity it is amazing. I highly recommend it. One thing that seem to separate him from other value investors is that not only he wants value, but he also wants to see a catalyst that can unlock the value.

More recently on Oct 2, 2008 Klarman said:


"We have had a 10% or so concentrated position about a dozen times over the last 20 years. Most of the time we have 3,5 and 6% position. We will take it higher if we see a catalyst for increased value. We would not own 10% position in a common stock, only because it seemed under-valued. We would have a greater than 10% position if there was a margin of safety. I see managers make mistakes with concentrated positions in similar industries."

If he only did it 12 times in 20 years, Klarman does not easily allocate above 6% of his portfolio to any stock, unless he feels very safe that he has a huge margin of safety he will not go to 10%. Obviously he rarely feels he has such a margin. Well now Klarman has 12% of his stock portfolio in NEWS CORP (NWS-A). So he must feel there is a huge margin of safety in NWS-A. If he alocated 12% to NEWS Corp he is telling us this is his best pick, and he only found such a great situation a dozen times in the past 20 years.

Newspapers and broadcast television stations depend on advertising revenues and in these hard times, companies can not afford much advertising. In fact, in their latest fillings, NEWS CORP earned $515 million, or 20 cents a share, compared with $732 million or 23 cents a share in the first fiscal quarter of 2008. On top of that they gave warning that operating income in fiscal 2009 will be far below its previous expectations. in 2007, Murdoch spiced up his End of the year gala by building an ice ring inside a hotel, complete with cartwheeling Santas, this year no party at all. So things are not good and may even get worst.

But we can now buy NWS-A for 50% below what Klarman paid when he felt he already had a large enough safety margin, something he rarely feels. Klarman obviously knows better than most how bad the economy can get since he had been putting aside around 50% of his money in cash for the past 2 years. (Yes, he made his 20% ROI with the other 50% only) so I assume he priced the bad economy in when he purchased NWS-A. Klarman would definitely not buy NWS based on the future expected earnings of MySpace or some Fox movie blockbuster. So I have to assume he thinks, as it is, NWS-A is worth substantially more than twice the price it is trading at today. (substantially more than what he paid).

P/E: 6.86

P/S: 0.47

P/B: 0.8

based on the Fair Value Calculator, Gurufocus Fair Value: $ 30.7

Margin Of Safety: 72%

5 yrs 12 months

Revenue Growth (%) 9.8 8.1

EBITDA Growth (%) 17.2 16.1

Earning Growth (%) 27.6 30.9

Free Cash Flow Growth% 5.5 6.5

2009 will NOt be like 2008, it will be worst.

Now I have been trying to understand this trade as it seems a good value, but does anybody know what would be the catalyst Klarman sees or does anybody have opinion on NWS-A. This is a stock I have not been able to put my hand around, yet i feel Klarman is telling us this is his best bet in years.

Rating: 2.9/5 (7 votes)


Alanb9 premium member - 8 years ago
If, as you say, he has 12% of his fund in NWS, and its price is currently 50% of when he bought it, there are other possibilities in existence other than he thinks it is his best choice and we can piggyback him with a great margin of safety. One possibility is that his other holdings have fallen even more than NWS. Another possibility is that a large portion of his cash has been consumed by client withdrawals.

What you need to know before you make the assumption that NWS is his best choice because he has 12% of his fund in it, is what % of his fund did he put into NWS AT THE TIME HE WAS BUYING, not with CURRENT valuations and cash.

I don't know what the answer is, but if you are interested in following your line of reasoning, make sure the premise of your logic is correct.
Bryan - 8 years ago    Report SPAM
Caution is required when viewing Klarman's portfolio holdings as he tends to hold a much larger proportion of bonds and distressed debt in his portfolio which don't show up in 13F filings than the other gurus listed on this site. In recent interviews and the Baupost Q3 letter he has said that he thinks that there is particular value in distressed debt so we should assume that he has a fair amount of it in his portfoilo at the moment. I am only guessing, but it is quite likely that he has less than 6% in NWS at present.

Nonetheless we know NWS is his main holding and knowing that is a very useful piece of information in itself.
David Pinsen
David Pinsen - 8 years ago    Report SPAM
Great points, Alan.
Cmraynew - 8 years ago    Report SPAM
You quote Klarman as saying: "I see managers make mistakes with concentrated positions in similar industries."

Recall also that a certain investor purchased a giant position in a capital intensive textile business. Concentrated positions do not a great investment make.

It'd rather focus on the catalyst and the rationale for the investment in Newscorp, rather than the observation that Klarman's position is concentrated.
Max7777 premium member - 8 years ago
Alanb9 wrote:" Another possibility is that a large portion of his cash has been consumed by client withdrawals."

Great point, if you were talking about another guru, but Klarman had 50% of his portfolio in cash already, so he could easily take care of withdrawals, without affecting his positions. Also keep in mind that he added almost 40% to this NWS-A position as recently as last Sept 2008 at $14/share.

His original position was taken over a year ago in Sept 2007 at around $21 per share. Even then it was one of his largest positions ever at 9.5% of his stock portfolio. So even then at $21 he felt he had a large margin of safety to allocate so much to it. The fact that he added to it only shows he has even more conviction now. He has sold out of many many positions in 2008 but added to only very few.


-A large positions for him, since it is against his usual rules of engagement, shows he strongly believes, above and beyond his usual undervalued picks. But like you, I do wish I knew what catalyst he is seeing, I am not seeing it yet.
Traderashish - 8 years ago    Report SPAM
what is the difference between NWS and NWSA?
Alanb9 premium member - 8 years ago
Max7777 Wrote:


> Great point, if you were talking about another

> guru, but Klarman had 50% of his portfolio in cash

> already, so he could easily take care of

> withdrawals, without affecting his positions. Also

> keep in mind that he added almost 40% to this

> NWS-A position as recently as last Sept 2008 at

> $14/share.

I either misunderstand you, or you missed my point. If his total assets were 100 million, with 50% in cash, 6% of his fund would be 6 million. If he had 50 million in withdrawals, he would be able to function without forced selling, but now his 6 million in a single position would be 12% of his fund.

Remember, for a percentage to increase, either the numerator needs to increase or the denominator decrease, or both, or the numerator's relative value to the denominator increase if both increase or decrease. You haven't told us which has happened with NWS within his funds.

I'm just trying to help.

Kuuks - 8 years ago    Report SPAM
Is he talking about putting more than 10% of his entire portfolio or just stock portfolio. Because 12% of his stock portfolio is probably not more than 2% of his entire portfolio assuming he has the 10 billion+ under management that most sources cite.
Max7777 premium member - 8 years ago

I appreciate your point, to answer you, Klarman's original position in NWS-A was one of his largest positions from day one, at 9.5% of his stock portfolio of 2007. This is rare for him to start with this large a position. In 2008 he increased the percent to 12% of that portfolio by buying more stocks (not because the portfolio shrunk).

I also believe Klarman is smart enough to take into account implications of withdrawals or portfolio size on any single position. He should be well aware of it since position size will have a direct impact on his yearly ROI. Therefore he would have adjusted it, rather than let the position become bigger as the portfolio shrinks as you write. But it seems he did just the opposite: he started with a 9% position, then as the stock was falling, the NWS position would have become smaller compared to the entire portfolio. So he increased it by 40% in sept 2008, so it would represent again a huge portion of the entire portfolio.


I think he is talking about 10% of his stock portfolio, since if you look at his portfolio over the years 6% is a large position for him. Unlike Buffett or Soros who usually have very large positions, he usually does not go above 6%. His overall portfolio even has a lot of physical real estate, etc..so that would not make much sense to mix these in a statement.


You are correct that Baupost Q3 letter was mostly about value in distressed debt. I did not think this would mean he should sell NWS-A, but it is possible.

Does anybody see a possible catalyst for NWS-A. The numbers look good, it does seem to have a good margin of safety. But where is the catalyst: The Wall Street Journal is a class act but papers are going the way of payphones, the WS website will grow and people pay for it but it is still a very small part of this huge empire, MySpace is growing but can they monetize it, Rupert Murdoch is 77 years old and shows no sign of slowing down. Obama is in, so Fox should not have as large a following. Most of all the economy is going to get worst and ad sales will be down. So what does he see here.
Alanb9 premium member - 8 years ago

thanks for the clarification.

Regarding Fox and Obama causing a decrease in viewers, I think you draw the wrong conclusion. An analagous situation would be Rush Limbaugh during the Clinton years. His viewership and listeners increased greatly. It wouldn't surprise me if people who disagree with Obama's policies leave the other networks with their constant adoration of the man and watch Fox instead in even greater numbers than they already have. I don't think that will appreciably change NWS, but it might.
Sabonis premium member - 8 years ago
I don’t know about a “catalyst” but this is the mega-short non-financial version of why I bought NWS and why I think the media company stocks are extremely interesting for the next 10+ years.

One of the big factors is the slogan that “Content is King”….how many different ways can you watch a movie?

On a movie screen, on a dvd player, on a blue ray player, on pay per view, on premium cable channels, on standard cable channels, on network tv, on your ipod, on your play station, etc. etc…the list will keep growing. Those that have the licensing rights for the content to play on these devices will reap the profits. The more avenues for someone to watch movies/tv shows, the more valuable the watchable content will be. Someone like FOX owns a gigantic amount of films from oldies to modern. They are able to use this content to cross promote other products in their portfolio (music, magazines, etc.).

For example, look at Paramount/Viacom and the TV show “The Hills”...

With “content” like “The Hills” Paramount Corp. no longer has to deal with expensive media stars like Brad Pitt and Angelina Jolie or prima donna movie directors who demand $20M per picture and become difficult to deal with.

If you have watched the show, the cast are just average nice looking kids in a well scripted soap opera, there is no “reality” involved. They are able to use this show as a platform to add huge product placement opportunities to generate ad revenue. Whatever Lauren or Heidi is wearing is big news. Their other media outlets can work hand in hand with each other and “cross promote” as they give Spencer or Lauren Conrad importance by running news stories on them in their newspapers, have them on their network talk shows and prominently feature them in their celeb tabloid magazines. ..all of which generates additional ad revenue.

During the show they can feature all the new music artists that their music department wants to promote and they can also tie in any of their other products that they can weave seamlessly into the “story” . This feels authentic because Spencer really is Spencer and not an actor playing Spencer.

What is the cost of all this? Basically nothing…no big time movie stars, no screen writers or unions, no directors, free advertising for their products and huge revenues from advertisers who want to tap into the buzz that the Hills generates.

When these “reality stars” get old, they just do the whole formula over again for the next generation. Plus they can customize this formula to different countries and cultures with small variations.

There are huge variations on this that will be very profitable for the studios. Look at the huge super-hero genre…they can take a mid-level movie star (Tobey McGuire) and pay him mid-level wages while Spiderman or Harry Potter (all no-name stars) generate huge profits. They can crank out sequel after sequel for each generation all the while using the Spiderman “content” to fill the vacancies in dvd players, pay-per-view, cable, etc.

Anyways…that’s the very short version and hopefully what Seth Klarman is looking at.

Fk - 8 years ago    Report SPAM

I think that's a very good guess to answer Max's question of what Seth sees in NWSA. That explains Seth's RHIE holding as well, they're betting on the value of the media content (they make quality t.v. miniseries).

So NWSA has a large libary of media. What % of the pie does the licensing of their media content contribute?
Traderashish - 8 years ago    Report SPAM
other than price what is the difference between buying NWS and NWSA?

Which should individual investor prefer and why?
Fk - 8 years ago    Report SPAM
What do you guys think of BBEP and LINE? Seth has a pretty large stake in both of those. LINE is almost 10% of his portfolio, 2nd largest position behind NWSA. BBEP is about 5.6% of portfolio, his most recent addition he increased his stake by over 800%. I have no idea what NWSA is worth or what it could be worth, but I do believe oil related companies worst case in the short term can drop another 50%, but in the next 5 years we'd see at least a double.

Mountaincloud wrote on another recent thread:

Mountaincloud says on Jan 19, 2009 at 9:02 AM:

Oh, actually, sold BRK and bought BBEP, LINE and USO (ETF) and after that 15% in cash.

Came across Baupost's 3Q08 letter, and in it Klarman mentiond 2 stocks (locked in return). I looked up his holding and they were BBEP and LINE. Look into them...lock

in dividend, yielding 15% and 20%....they have to payout the dividend because the way these two companies structured.

USO: buying ETF is better than buying bunch of oil companies..hard to cheery pick stocks.....and USO is cheaper so how.....oil can't stay around $35 for too long (my own opinion)
Silverpill23 - 8 years ago    Report SPAM
I believe LINE and BBEP have locked in prices of around $80+ per barrel until 2010-2011/12.

However, for the individual investor I think it is important to be aware of tax considerations in that they are taken as income tax vs long term gains.

I believe they also have restrictions involving tax shelters where dividends of $1000+ per year incur penalties of some form.

Beyond that, I think both companies will be able to pay their dividends until 2010/11.

Kuuks - 8 years ago    Report SPAM
I just read the 3Q letter... it makes me respect Klarman even more (if that's possible). He's so clear and sobering. It seems like all other fund managers have lost their footing and are trying to paint a wonderful picture so as to attract funds and "take advantage of the opportunities".

Traderashish - from what I understand, NWS-A are the voting shares. Rupert Murdoch owns the majority of these and is therefore in complete control of the company. Not that that is a bad thing, he is a very capable manager.

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