It is that time of the year again. The largest hedge funds have just filed their 13Fs for the first quarter and, as usual, there are some interesting conversations about position changes.
Seth Klarman (Trades, Portfolio) is always one of the most watched fund managers when it comes to 13Fs. The value fund manager has a reputation for buying the market’s cheapest stocks and holding on for an extended period, so changes are scrutinized to try and establish the reasoning behind his trades.
An active quarter
The first quarter was a relatively active one for Klarman, whose hedge fund Baupost made a number of portfolio changes. For a start, the hedge fund acquired a new position in Colony NorthStar (CLNS, Financial). Accounting for around 7.3% of the Baupost equity portfolio, the NorthStar position comes as the real estate investment trust has lost nearly 30% of its value over the past three years. According to the 13F, Baupost acquired the position at a price of $12.91, just above the quarter low of $12.65.
The other significant acquisition made by the hedge fund during the quarter was Apple supplier Qorvo Inc. (QRVO, Financial). Klarman acquired 7.2 million shares for an average price of $68.56 per share. This position now accounts for 5.8% of the overall portfolio.
It seems both of these holdings were acquired using funds from the sale of other positions, namely Synchrony Financial (SYF, Financial) and Allergan (AGN, Financial). During the quarter, Klarman reduced these positions by 14.5% and 29.1% respectively. After a strong quarter in which the stock rose by around 20%, Baupost was not the only fund selling Allergan last month. David Tepper (Trades, Portfolio)’s Appaloosa Management, Leon Cooperman (Trades, Portfolio)’s Omega Advisors, Wallace Weitz (Trades, Portfolio)’s Weitz Value and John Griffin (Trades, Portfolio)’s Blue Ridge all dumped 20% to 30% of their holdings in the company during the quarter.
Time to sell?
The Synchrony sale has to be one of the most exciting portfolio movements for Klarman. Indeed, Klarman only acquired the position during the third quarter of 2016 and then added in the fourth quarter, taking the holding to 9.9% of Baupost’s overall equity portfolio.
By the end of the first quarter, the holding had been reduced to just 7.2% of the portfolio. At the end of April, the company issued a terrible first-quarter earnings report, which prompted the stock to lose around a fifth of its value in one day.
For the quarter, the company that operates as a private-label card issuer for store cards offered by Wal-Mart (WMT, Financial), JC Penney (JCP, Financial) and Lowe's (LOW, Financial), to name a few, reported a 14% decline in net profit year over year for the first quarter as loan losses increased markedly. Net charge-offs grew to roughly 5.3% of loans on an annualized basis, up from about 4.7% last year. Loans more than 30 days past due rose to 4.25%, up from 3.85%. Off the back of these figures, the company recorded $1.3 billion of loan loss provisions, up 45% year over year. At the end of the first quarter, Synchrony's allowance for loan losses stood at 6.37% of its loans outstanding, an increase from 5.50% in the same period a year ago.
Whatever caused Klarman to dump this position seems to have been the right choice as Synchrony’s outlook for the rest of the year is now significantly reduced. What’s more, as with all credit providers, there is the question of whether the trend of rising loan loss provisions continue going forward. If it does, Synchrony’s problems could only just be getting started.
Oil holdings
The other notable stock purchase Klarman made during the quarter is 6.6 million shares of Silver Run Acquisition Corp. II (SRUNU, Financial). Accounting for just 0.82% of Baupost’s equity portfolio, this position is hardly going to make or break Klarman’s reputation. Nonetheless, it is interesting because of the activities the business engages in. Silver Run describes itself as an “an energy-focused special purpose entity formed for the purpose of entering into a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses.” So it seems Klarman believes there is value to be found in the beaten-down energy sector.
Disclosure:Ă‚ The author owns no stock mentioned.
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