Monitoring the portfolios of legendary investors is often a great way to build your watchlist. If you want to follow the stock picks of the very best, Seth Klarman (Trades, Portfolio) is an ideal place to start.
Other investors might urge you to follow a better-known value investor like Warren Buffett (Trades, Portfolio), but monitoring Klarman has a few advantages.
First, he runs a smaller portfolio. Klarman’s Baupost Group only manages $31 billion. Buffett’s Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) is worth more than $500 billion.
Today, Buffett can only buy large companies, limiting his potential investment universe. Klarman can invest in thousands of additional companies.
Second, Buffett doesn’t do all of his own investing.
In recent years, he’s ceded much of the portfolio to other managers. While these managers are undoubtedly skilled, following Berkshire Hathaway’s stocks doesn’t necessarily mean you’re following Buffett himself.
Since 1982, Klarman has compounded his portfolio by more than 20% per year. If you want to profit directly from one of the greatest minds in investing history, here’s your chance.
Here are the top three stocks Klarman is buying according to recent regulatory filings.
Last quarter, Klarman purchased 21 million shares of eBay for roughly $28 per share. Klarman has booked a nice profit since the purchase, with shares up to $38.
Perhaps it’s odd to see a value investor buy a tech stock, but value can be found in any sector of the market. With most asset classes pricey on a historical basis, Klarman has urged investors to get “creative” in order to find value.
While much of the attention remains on tech giants like Apple (AAPL, Financial) and Microsoft (MSFT, Financial), not to mention high-growth darlings like Shopify (SHOP, Financial), eBay has actually done incredibly well building wealth for shareholders.
Over the last decade, eBay shares are up more than 400%, handily outpacing the S&P 500 (SPY, Financial). Return on invested capital has consistently been in the double-digits during that time.
This year, analysts expect the company to earn $2.69 per share. Using a 10% discount rate, shares appear fairly priced. A stock priced to achieve 10% annual returns, however, is fairly attractive in this market.
Antero Resources Corp. (AR, Financial)
Last quarter, Klarman purchased 2 million shares of Antero Resources. Note that Antero Midstream (AM, Financial) is a separate company, though Antero Resources does own a 31% stake.
Klarman's average purchase price is roughly $24.70 per share. With the stock currently trading at $7.20 per share, this could be a great way to follow Klarman’s bet, one that he continues to add to as the price falls.
As a natural gas producer, Antero has had a difficult time adjusting to a lower-for-longer environment. In 2014, shares were above $70. They’ve lost around 90% of their value since. With a market cap of $2.2 billion, Antero is a fraction of its former size.
Still, Klarman sees upside. Clues to his thesis may be gleaned from his investment in Cheniere Energy (LNG, Financial), which is one of his largest positions.
Cheniere plans on exporting natural gas abroad to Europe and Asia, where prices are 200% to 300% higher, essentially arbitraging North America’s supply glut. Export capacity is set to come online shortly, and U.S. natural gas prices may finally see a bump after decades of decline.
Natural gas prices are currently $2.60 per 1 million British thermal units. If they returned to their five-year average of $3.15 per mmbtu, Antero would produce $2.5 billion to $3 billion in free cash flow over the next four years.
That’s more than the entire market cap of the company. It’s enough to pay off most of its debt and conduct a massive share buyback if the stock price remains depressed.
Management owns 9% of the company, so they’re likely aligned to make Klarman a profit on his growing position.
Akebia Therapeutics Inc. (AKBA, Financial)
Last quarter, Klarman purchased nearly 24.5 million shares of Akebia. His average purchase price is roughly $5.50 per share.
There’s a catch here, however.
On June 28, Akebia and Keryx Biopharmaceuticals announced an all-stock merger with an initial equity value of around $1.3 billion. The combined entity will streamline each company’s pipelines to create a larger pharmaceutical company focused on chronic kidney disease.
Klarman had terrible luck with Keryx. His average purchase price was around $14, but his firm bought at prices much higher than that. At the time of the merger, Keryx stock traded at less than $4.
Klarman’s “purchase” was simply him transferring his ownership from Keryx to Akebia.
Following the merger’s completion, shares of Akebia sold off sharply, from $9 to $5, likely due to institutional investors rebalancing their portfolios, dumping what appeared to be a broken story. Shares rallied back to the $9 range, but sank yet again to just $6, resulting in a market cap of $730 million.
Are the shares a buy? That ultimately depends on the fate of Akebia’s pipeline.
The company has multiple clinical catalysts over next 18 months for Phase 3 product candidates with multibillion-dollar market opportunities. With a $431 million cash position, it has plenty of firepower to see each of its trials through to completion.
Predicting the results of clinical trials can be difficult, but Klarman seems to remain confident that the company will win in the end.
Read more here:
- 5 Lessons From Seth Klarman's 2019 Investor Letter
- Here's Why Citron Research Loves This Retail Stock
- 2 Biotech Stock Picks From Legendary Investor Joseph Edelman
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