Seth Klarman is the founder and president of The Baupost Group, a Boston-based private investment partnership, and the author of book Margin of Safety. According to the OID featured article on Seth Klarman, Klarman has an outstanding track record as an investor. Since its February 1, 1983 inception through December 31 st, 2008, his Baupost Limited Partnership Class A-1 has provided its limited partners an average annual return of 16.5% net of fees and incentives, versus 10.1% for the S&P 500. During the “lost decade”, Baupost obliterated the averages, returning 14.8% and 15.9% for the 5 and 10-year periods ending December 31 st versus -2.2% and -1.4%, respectively, for the S&P.
Seth Klarman's investment style is sometimes considered similar to that of a young Warren Buffett. Before founding Baupost, Klarman worked for Max Heine and Michael Price of the Mutual Shares fund (now a part of Franklin Templeton Investments). It is interesting, we couldn’t help noticing that another Investment Guru -- David Winters who we reviewed a couple of days ago, also worked for the same company, and grew into an investment guru on his own right. Sometimes it is important to choose the kind of company you work for and the kind of people you associate with.
Seth Klarman rarely comments on the individual stocks he owns, but the OID article contains the following advice from him that worth quoting:
So when individual stocks reach levels where they are truly undervalued, what are value investors supposed to do other than to buy them? Anything else is market timing. Investors live in real time — not in several year intervals, but in months, days, hours and even minutes. Because we cannot know the future — and cannot see in the middle of the cycle its end, and not even necessarily its beginning — we will be bombarded by apparent opportunity as the market descends. We will see tempting bargains and value imposters, false rallies and legitimate recoveries, smart bottom fishers and mindless buy-the-dippers — and we will never know until after the fact how low things might go.
We can become macro forecasters, predicting 10 of the next two recessions, or we can ignore the macro economy, buying bargains that cease to look cheap as the economy deteriorates and credit contracts and the tide goes out on all marketable securities.
When a value investor is tempted to become something other than what he or she is, I find it best to recall the wisdom of Graham and Dodd. Graham and Dodd have provided us with a remarkable road map that has been carried on some of the world’s most successful investment journeys for 75 years — a road map that allows us to navigate through difficult, even uncharted, territory and come out ahead. In a market like we’ve been experiencing, most investors lose their rudders. They become incapacitated, unable to navigate amidst extreme turmoil, declining corporate results, and a litany of economic woes and mounting losses. They become unwilling to part with their cash — afraid of possible redemptions, and afraid of adding to their losses. Investors today, who are tempted to pull out of the market and wait for some kind of “all clear” signal before recommitting, would be well advised to remember the counsel of Graham and Dodd who wrote in 1934: “While we were writing, we had to combat a widespread conviction that financial debacle was to be the permanent order.” If they could say that then, I must restate it now.
No. 1: News Corp. (NWS-A), Weightings: 18.03% - 27,500,000 Shares
News Corp. is a diversified entertainment company with operations in eight industry segments: filmed entertainment; television; cable network programming; direct broadcast satellite television; magazines and inserts; newspapers and information services; book publishing; and other. News Corp. has a market cap of $15.45 billion; its shares were traded at around $0 with a P/E ratio of 6.86 and P/S ratio of 0.47. The dividend yield of News Corp. stocks is 1.41%. News Corp. had an annual average earning growth of 17.2% over the past 5 years.
Klarman had 6.8 million shares of NWS-A since 2Q05. He has been trading in and out of the stock since then. His ownership reached a trough of 2.0 million shares in 1Q07 when the stock was at highs. Since then, he rebuilt his stake and in 1Q09,when the stock price collapsed he bought 10.6 million shares and brought his total shares to 27.5 million shares. Klarman never owned so much NWS-A shares in recent history.
No. 2: PDL BioPharma Inc. (PDLI), Weightings: 10.91% - 15,559,608 Shares
Protein Design Labs Inc. is a biopharmaceutical company focused on the research, development and commercialization of novel therapies for inflammation and autoimmune diseases acute cardiac conditions and cancer. PDL BioPharma Inc. has a market cap of $855.39 million; its shares were traded at around $7.16 with a P/E ratio of 7.09 and P/S ratio of 2.91. The dividend yield of PDL BioPharma Inc. stocks is 13.97%.
Klarman assumed a small position (461,600 shares) in 1Q08 and then quickly build a large position (14.8 million shares) in 2Q08. His ownership has since maintained at a high level and in 1Q09, he bought about 800,000 share, bringing the total to 15.6 million shares.
No. 3: Theravance Inc. (THRX), Weightings: 15.21% - 9,033,741 Shares
Theravance Inc is focused on the discovery, development, and commercialization of small molecule medicines for unmet medical needs across a number of therapeutic areas including respiratory disease, bacterial infections, overactive bladder, and gastrointestinal disorders. Theravance Inc. has a market cap of $861.59 million; its shares were traded at around $13.8 with and P/S ratio of 37.3.
Klarman first bought 5.3 million shares of THRX in 1Q08, at the same time he bought PDLI. He built his position through 2008 and by 4Q08, he had 9.0 million shares in his hand. He maintained these shares in 2009.
No. 4: Exterran Holdings Inc. (EXH), Weightings: 7.82% - 4,928,925 Shares
Exterran Holdings Inc. is the global market leader in full service natural gas compression and a premier provider of sales, operations, maintenance, fabrication service and equipment for oil and gas production processing and transportation applications. has a market cap of $1.14 billion; its shares were traded at around $18.3 with a P/E ratio of 7.04 and P/S ratio of 0.36. EXTERRAN HOLDINGS INC. had an annual average earning growth of 8.8% over the past 10 years.
He initiated a position of about 0.96 million in EXH in 3Q07 shares when the stocks were traded at around $80 per share. He has been doubling down since then, by 4Q08, he owned 4.9 million shares and the stock ended 2008 at $21.3. Once can say that Klarman’s EXH is the equivalent of Warren Buffett’s COP.
What’s different is that Klarman held on to his shares in 1Q09.
No. 5: Linn Energy LLC (LINE), Weightings: 5.9% - 4,000,000 Shares
Linn Energy LLC is an independent oil and gas company focused on the development and acquisition of long-lived properties which complement its asset profile in producing basins within the United States. Linn Energy LLC has a market cap of $2.4 billion; its shares were traded at around $19.94 with a P/E ratio of 12.16 and P/S ratio of 1.67. The dividend yield of Linn Energy LLC stocks is 12.64%.
This is another Oil and Gas company in Klarman’s top holdings. He initiated a position of 4.1 million shares in 4Q07 and been trading in and out of the stock as the stock price fluctuates. His ownership peaked in 3Q08 at 10 million share and he has been selling the stock. He sold about 4 million shares during 1Q09 and owned 4 million shares as of March 31, 2009.
No. 6: LIBERTY MEDIA CORPORATION - SERIES A LIBERTY ENTER (LMDIA), Weightings: 8.22% - 4,162,901 Shares
Liberty Media Corporation is a holding company which through its subsidiaries owns interests in a broad range of electronic retailing, media communications and entertainment businesses. LIBERTY MEDIA CORPORATION - SERIES A LIBERTY ENTER has a market cap of $11.72 billion; its shares were traded at around $23.69 .
Klarman started to own 3.2 million shares in 2Q08, and was reported to own 4.8 million shares in 3Q08. But he has sold 640, 000 shares in 4Q08 and maintained 4.1 million shares during the past quarter. Judged from relatively stable market price history of the stock, this is Klarman’s candidate of “selling the cheap” in order to ‘buy something cheaper”.
Conclusion: Seth Klarman may resemble Warren Buffett at youth, but his appetite for biotech companies like PDLI and THRX, and his appreciation of media companies like NWS-A and LMDIA indicate his has very different circle of competence from that of Warren Buffett. He also dived into energy companies, but unlike Warren Buffett, he is holding on to and even adding to them