Seth Klarman (Trades, Portfolio) is generally known as a value investor. Over the past three to four decades, his hedge fund, Baupost has made tens of billions of dollars in profits for its investors by focusing on undervalued securities.
However, Klarman and his team don't just focus on equities. For example, the hedge fund made a significant profit buying the bonds of bankrupt Icelandic banks after the financial crisis. It also profited by buying the debt of Enron and Lehman Brothers.
Over the past decade, the hedge fund has also been expanding into real estate and private equity investments. This hedge fund is looking for value wherever Klarman and his team can find it.
Unfortunately, we only have a limited window into Klarman's investment activity. The hedge fund reports its equity holdings every quarter on the SEC's 13F form. However, this report only details equity investments in the U.S. equity markets. It does not detail international equity investments, credit investments, real estate holdings, or cash holdings. To give some idea as to how limited these reports are, Baupost's 13F for the second quarter of 2021 only details $12.3 billion of investments. The group's total assets under management exceed $31 billion, which leaves a big gap between what is reported and what is not.
Still, these reports can be a great starting point for further research, and they provide some insight into where the value investor is currently seeing opportunities in the market.
Smaller holdings
Baupost's large equity holdings are frequently reviewed in the financial media. That is why I like to concentrate on the smaller positions, which may fly under the radar.
One new smaller position that was added to the portfolio in the second quarter was ironSource Ltd (IS, Financial). Baupost acquired 8 million shares in this company during the three months to the end of June, giving it a 0.7% portfolio weight.
ironSource is the leading business platform for the app economy. It helps app developers turn their projects into a scalable, successful businesses. ironSource itself has been scaling rapidly.
Between 2019 and 2020, revenues increased 83% and net income jumped 13% to $95 million. Revenues have continued to expand this year, with revenue and income in the second quarter up 82% compared to the year-ago period. Around 7% of the company's market capitalization is cash and it has no debt.
All in all, this is a profitable, cash-rich technology company in a booming sector that is reporting explosive growth. It is not a traditional value investment, but Klarman may believe the stock offers growth at a reasonable price.
Another technology stock that features as a small position in Baupost's portfolio is Verint Systems Inc (VRNT, Financial). This organization is a global leader in customer experience services, powered by automation and the cloud.
This is another cash-rich technology company that has seen revenues and profits expand in recent years. Around 22% of its market capitalization is cash, which is encouraging, even though the group reported a modest loss in its most recent financial year. It was profitable in fiscal 2019 and 2020.
The final technology company in Baupost's portfolio I will cover in this article is Shaw Communications Inc. (SJR, Financial). This was a new addition in the third quarter. The hedge fund acquired 7.5 million shares, giving the holding a 1.8% portfolio weight. The company provides telecommunications services primarily in Alberta and British Columbia.
If I had to guess why the value investor bought a new holding in this stock during the quarter, I would say it is a merger arbitrage trade, though this is just my personal speculation. In March, the stock jumped after telecommunications specialist Rogers Communications (RCI, Financial) offered to acquire the business for 20 billion Canadia dollars ($16 billion). Its current market value is just $14.6 billion, suggesting the market does not believe the deal will go ahead. Klarman may be betting that it can.
