Yesterday saw the release of the final round of 13F filings from some of the world’s most followed hedge fund investors, and there were a few surprises contained within figures.
Aside from the general shift away from tech stocks toward financials and Warren Buffett (Trades, Portfolio)’s decision to go all-in on airlines, some of the most exciting portfolio movements came from renowned value investor Seth Klarman (Trades, Portfolio), whose year-end letter has ignited plenty of buzz among the investment community over the past week.
Among the most interesting movements in Klarman’s portfolio for the quarter were the sale of Baupost’s holding of PayPal Holdings Inc. (NASDAQ:PYPL), a 5 million share position, and a reduction of 22% in the firm’s Cheniere Energy Inc. (LNG) position.
The Cheniere position is Baupost’s largest, coming in at 11.85% of the portfolio. This holding was around 15% of the portfolio before the recent sales. While it is not possible to know the logic behind this sale, it would appear Klaman has decided to take some profits off the table with the LNG producer. Cheniere was first added to Baupost’s portfolio during the first quarter of 2014 when the stock trading between $42 and $55 a share. Klarman continued to buy until the second quarter of 2016 as the share price traded between $84 and $25. In the third quarter, he began to take some money off the table and it now looks as if Klarman is trying to exit the position, albeit slowly.
At 11.85% of the portfolio, Cheniere is now close to being overtaken by Viasat Inc. (NASDAQ:VSAT) in Klarman’s portfolio. The billionaire hedge fund manager added 14.1% to this position during the quarter. Other notable buys include Synchrony Financial (NYSE:SYF), which is now 9.9% of the overall portfolio after the fund increased its position by 17.8%, and Allergan PLC (NYSE:AGN), which is now 9.5% of the overall portfolio after the position was increased by 71.5%.
New buys for the quarter include Syngenta AG (NYSE:SYT), Cardinal Health Inc. (NYSE:CAH), Centennial Resource Development Inc. (NASDAQ:CDEV), AmerisourceBergen Corp. (NYSE:ABC), Liberty Expedia Holdings Inc. (NASDAQ:LEXEA), McKesson Corp. (NYSE:MCK) and Saban Capital Acquisition Corp. (SCAC).
The largest position increase, regarding the overall percentage added, was for NorthStar Realty Finance Corp. (NRF). Here, Klarman increased his holding by 165% to 14.6 million shares or 2.9% of his overall equity portfolio. The second-largest position increase was at Northstar Asset Management Group Inc. (NSAM), where Klarman hiked his holding by 89% to 18.7 million shares or 3.7% of the overall equity portfolio. Twenty-First Century Fox Inc. (FOXA) also appears to take all the boxes for Klarman as he hiked his position in the company by 50.1% to 19 million shares or 7.1% of the overall equity portfolio.
Look to the long term
In his year-end 2016 letter to Baupost's investors, Klarman wrote about the need for value investors to take a long-term view, wait for the right opportunities and not invest in the market unless the right opportunity presents itself at the right price. Looking through his year-end positions, at first glance, it would seem he has taken a long-term view to all of his investment decisions as few of them are trading at what would genuinely be called bargain basement valuations.
Viasat, for example, the second-largest position, is currently trading at a forward price-earnings ratio of 80.5 and EV/EBITDA ratio of 15.6. The shares are trading at a price-book ratio of 2.3. What is more, Baupost’s largest position, Cheniere, is drowning in debt and has an estimated book value per share of -$6.80. The company is expected to report a loss of $650 million for 2016 and $132 million for 2017.
The fact that there is not a clear investment case for both of these positions is a warning to investors that blindly following a guru investor into a position is a recipe for disaster. Just because Klarman is one of the world’s most respected value investors does not mean he does not make mistakes. Unless you understand the thesis behind a particular investment, it is unwise to commit yourself as you will likely end up out of your depth.
Disclosure: The author owns no share mentioned.
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