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Rupert Hargreaves
Rupert Hargreaves
Articles (1344)  | Author's Website |

Seth Klarman's Baupost Is Buying

The hedge fund manager has been deploying capital for the first time in years

Seth Klarman (Trades, Portfolio) has been busy deploying some of his cash mountain over the past few weeks. According to various reports, Klarman has spent at least $1.5 billion of his investors' cash on buying unloved assets and boosting Baupost's holdings in some of its most-loved positions over the past few weeks.

Baupost deploys cash

According to Klarman's year-end letter to investors, Baupost's cash balance was around 31% of assets under management at the end of 2019.

The hedge fund managed around $29 billion for clients at the end of 2019. That suggests that the overall cash balance was around $9 billion, which is roughly the same size as the fund's public equity portfolio at the time.

According to people with knowledge of the inner workings of the fund, Baupost's cash balance has reportedly dropped to 26% of assets under management. Around 6% of this balance is earmarked for future transactions, suggesting the true level of cash is closer to 20%.

But that's not all. The insider reports suggest that Klarman made a profit to the tune of $1 billion betting against stocks and corporate credit during March. On top of this, he opened his fund up to investors for the first time since 2011. Baupost has been closed to new commitments from existing investors since 2011, and new commitments from new investors since 2008. It is unclear, at this stage, how much new capital has been committed to the fund.

Considering all of the above, it is impossible to put an accurate dollar figure on how much money the value investor has invested in selected value opportunities over the past few weeks. Nevertheless, it is clear to me that for the first time in a long time, Klarman sees value in the market.

We do not currently know the exact investments Baupost added to its portfolio in March. Baupost's quarterly 13F report is filed after the end of each calendar quarter, and it only reveals public stock positions of U.S.-listed businesses. It excludes foreign stock holdings, cash weighting, credit positions, real estate holdings and any other assets the hedge fund might be interested in (for example, we know Baupost has owned insurance claims in the past, which are certainly not included on 13Fs).

That being said, according to Bloomberg, Klarman has been adding to his existing holdings of Liberty Global (NASDAQ:LBTYK) and eBay (NASDAQ:EBAY) over the past few weeks as well as initiating new positions in residential mortgage-backed securities, HP Inc. (NYSE:HPE) and Google's parent company Alphabet (NASDAQ:GOOG).

Buying value

According to the hedge fund's latest 13F filing for the quarter ended Dec. 31, 2019, Liberty Global was the most substantial single public equity investment in Baupost's portfolio at the time. It owned 52.4 million shares in the group with a value of $1.1 billion, giving it a 13.3% portfolio weight. eBay was the fourth most significant position in the portfolio at the end of 2019. Baupost owned 20 million shares in the group at the end of the year, giving it an 8.4% portfolio weight.

Shares of Liberty plunged in the market sell-off in March. The stock hit a 52-week low of $14.35 compared to the average buying price in Baupost's portfolio of $21.80.

If Klarman liked the stock at over $20, he must like it better at below $15. Shares in the company are dealing at a price-to-cash-flow ratio of just 2.6 and a price-to-book ratio of 0.8 after recent declines. That's compared to a five-year averages of 4.8 and 3.2, respectively. The enterprise value to Ebitda ratio, which might be more appropriate considering the group's capital structure, is 8 at the time of writing compared to the five-year average of 9.6.

Meanwhile, shares in online auction giant eBay are dealing at a PCF ratio of 9.6 compared to the five-year average of 11.5 and price-earnings ratio of 16.6 compared to a five-year average of 13.2.

Disclosure: The author owns no share mentioned.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

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