Seth Klarman (Trades, Portfolio), manager of The Baupost Group, has revealed his portfolio for the fourth quarter. Top trades include new buys in Intel Corp. (INTC, Financial) and Marathon Petroleum Corp. (MPC, Financial) and selling out of HD Supply Holdings Inc. (HDS, Financial) and HP Inc. (HPQ, Financial). The guru also reduced his ViacomCBS Inc. (VIAC, Financial) holding.
Klarman's Boston-based hedge fund searches for value opportunities through a wide array of options, including stocks, distressed debt, liquidations and foreign equities. Despite investing around the world in many different options, Klarman does not mind holding cash when opportunities are scarce. He adamantly warns people against investing without considering the risks incurred to generate returns.
Portfolio overview
At the end of the quarter, Klarman's portfolio contained 45 stocks, with 13 new holdings. It is valued at $10.81 billion and has seen a turnover rate of 21%. Top holdings include eBay Inc. (EBAY, Financial), Liberty Global PLC (LBTYK, Financial), Intel, Qorvo Inc. (QRVO, Financial) and Fox Corp. (FOXA, Financial).
By weight, the top three sectors represented are communication services (34.19%), technology (27.41%) and consumer cyclical (14.47%).
Intel
The fourth quarter saw Klarman establish a new top holding in his portfolio with the purchase of Intel (INTC, Financial). The guru purchased 18.18 million shares that traded at an average price of $48.78 during the quarter. Overall, the purchase had an impact of 8.38% on the portfolio and GuruFocus estimates the holding has already gained 26.82%.
Intel is one of the world's largest chipmakers. It designs and manufactures microprocessors for the global personal computer and data center markets. Intel pioneered the x86 architecture for microprocessors. It was the prime proponent of Moore's law for advances in semiconductor manufacturing, though the company has recently faced manufacturing delays. While Intel's server processor business has benefited from the shift to the cloud, it has also been expanding into new adjacencies as the personal computer market has declined. These include areas such as the internet of things, memory, artificial intelligence and automotive. Intel has been active on the merger and acquisitions front, acquiring Altera, Mobileye, Movidius and Habana Labs in order to assist its efforts in non-PC arenas.
On Feb. 15, the stock was trading at $61.87 per share with a market cap of $251.36 billion. According to the GF Value Line, the shares are fairly valued.
GuruFocus gives the company a financial strength rating of 6 out of 10, a profitability rank of 9 out of 10 and a valuation rank of 7 out of 10. There is currently one severe warning sign issued for a declining gross margin percentage. Despite the warning sign, Intel's strong profitability rank is propped up by an operating margin and net margin that outdo more than 94% of the industry.
ViacomCBS
The guru slashed his ViacomCBS(VIAC, Financial) holding by 75.05% with the sale of 14.13 million shares. During the quarter, the shares traded at an average price of $32.15. GuruFocus estimates the total loss of the holding at -15.61% and the sale had an overall impact of -4.29% on the portfolio.
ViacomCBS is the recombination of CBS and Viacom that has created a media conglomerate operating around the world. CBS' television assets include the CBS television network, 28 local TV stations and 50% of CW, a joint venture between CBS and Time Warner. The company also owns Showtime and Simon & Schuster. Viacom owns several leading cable network properties, including Nickelodeon, MTV, BET, Comedy Central, VH1, CMT and Paramount. Viacom has also built several online properties on the strength of these brands. Viacom's Paramount Pictures produces original motion pictures and owns a library of 2,500 films, including the "Mission: Impossible" and "Transformers" series.
As of Feb. 15, the stock was trading at $58.31 per share with a market cap of $35.99 billion. Shares are significantly overvalued according to the GF Value Line.
GuruFocus gives the company a financial strength rating of 4 out of 10, a profitability rank of 8 out of 10 and a valuation rank of 6 out of 10. There are currently four severe warning signs issued, including days sales outstanding building up, declining operating margin percentage and an Altman Z-Score of 1.68 placing the company in the distress column. Debt levels made a major jump in 2018 without cash levels rising as well.
HD Supply
Klarman sold out of HD Supply (HDS, Financial) during the fourth quarter. The remaining 6.81 million shares traded at an average price of $48.86 per share during the quarter. Overall, the sale had an impact of -3.05% and GuruFocus estimates that Klarman gained 31.58% on the holding.
Through a combination of acquisitions and organic growth, HD Supply has become one of the largest industrial distributors in North America. It is currently the market leader in the two sectors in which it operates (facilities and home improvement maintenance, repair, and operations and specialty construction). Today, HD Supply offers approximately 600,000 stock-keeping units and serves 500,000 customers through 270 branches and 44 distribution centers across the United States and Canada. HD Supply sold its construction and industrial business for $2.5 billion net of taxes and transaction costs in October 2020. On Nov. 16, Home Depot announced it had entered into a definitive agreement to acquire HD Supply for $56 per share.
The stock was trading at $55.99 per share with a market cap of $8.69 billion on Feb. 15. Shares are significantly valued according to the GF Value Line.
GuruFocus gives the company a financial strength rating of 7 out of 10 and a profitability rank of 6 out of 10. There is currently one severe warning sign for a Beneish M-Score indicating the company is a possible manipulator of their financials. The company turned its financials around in 2016 with positive net income and revenue numbers slowly rising throughout the following years.
Marathon
Another new holding in Klarman's portfolio was established with the purchase of 7.69 million shares of Marathon (MPC, Financial). The shares traded at an average price of $36.02 during the quarter and the purchase had an 2.94% impact on the portfolio. GuruFocus estimates that Klarman has already gained 40.09% on the holding.
Marathon Petroleum is an independent refiner with 13 refineries in the midcontinent, West Coast and Gulf Coast of the United States with total throughput capacity of 2.8 million barrels per day. The company also owns and operates midstream assets primarily through its listed MLP, MPLX.
On Feb. 15, the stock was trading at $50.46 per share with a market cap of $32.83 billion. The GF Value Line shows the shares trading at a modestly overvalued rating.
GuruFocus gives the company a financial strength rating of 3 out of 10 and a profitability rank of 7 out of 10. There are currently five warning signs issued, including new long-term debt and poor financial strength. A current negative return on invested capital is destroying any value the company tries to add as it grows.
HP
Klarman also sold out of his holding in HP (HPQ, Financial) that he established at the end of 2019. He sold his remaining 13.30 million shares at an average price of $21.02 per share. Overall, the sale had an impact of -2.74% on the portfolio and GuruFocus estimates Klarman lost a total of 17.53% on the holding.
HP is a leading provider of computers, printers and printer supplies. The company's three operating business segments are its personal systems, containing notebooks, desktops and workstations; and its printing segment which contains supplies, consumer hardware and commercial hardware; and corporate investments. In 2015, Hewlett-Packard was separated into HP Inc. and Hewlett Packard Enterprise and the Palo Alto, California-based company sells on a global scale.
As of Feb. 15, the stock was trading at $27.49 per share with a market cap of $35.45 billion. It is trading at a modestly overvalued rating according to the GF Value Line.
GuruFocus gives the company a financial strength rating of 5 out of 10 a profitability rank of 7 out of 10 and a valuation rank of 5 out of 10. There is currently one severe warning sign issued for a declining operating margin percentage. Cash flows are significantly lower than they were prior to 2014, but they still easily cover the company's dividend payouts.
Disclosure: Author owns no stocks mentioned.
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