Seth Klarman (Trades, Portfolio)'s Baupost hedge fund only made a few changes to its equity portfolio in the fourth quarter of 2021, according to its latest 13F report.
For those who aren't familiar with 13Fs, hedge funds that own at least $100 million worth of U.S.-listed stocks are required to file a 13F form with the SEC 45 days after the end of each fiscal quarter. This report provides a snapshot into the world of hedge funds, listing their equity positions as of the quarter's end, but it has some limitations. It only shows U.S. equity positions and does not include credit, cash or international equity holdings.
For example, Baupost's 13F report details $10 billion of equity investments, but the hedge fund manages more than $30 billion of assets for clients worldwide, around 30% of which is usually cash. This suggests that we only have visibility on around a third of the overall portfolio.
Still, the report can be a great starting point for further research as it highlights where this successful value investor is currently finding opportunities in the U.S. equity market.
Buying tech at a discount
Last quarter, Klarman and his team were mainly buying cheap tech stocks. For example, the hedge fund increased its position in Qorvo (QRVO, Financial) by around 17%, giving it a 9.4% weight in the portfolio as of the quarter's end and making it the second-largest equity position after Liberty Global (LBTYK, Financial), which makes up around 15% of the equity portfolio.
Baupost has owned Qorvo since the first quarter of 2017. The hedge fund built a position of around 11 million shares in the company before selling the majority of the holding. The position had fallen to approximately 2.8 million shares as of the fourth quarter of 2019. Klarman and his team started building the position again in 2020, and now the fund holds around 6 million shares.
The company provides radio-frequency (RF) solutions for mobile, defense and aerospace applications. These are highly regulated and specialist industries, suggesting the company has a solid competitive advantage and relationships with its customers. This advantage helped the company earn a mid-teens return on capital employed and an operating profit margin of 21% for 2021.
Despite these qualities, the stock is trading at a forward price-earnings ratio of just 18 and an enterprise-value-to-Ebitda ratio of 9.8.
The largest new addition to the portfolio in the fourth quarter was Fiserv (FISV, Financial). The hedge fund purchased 3 million shares in the company with a total value of $316 million. It has a 3.2% portfolio weight.
Like Qorvo, Fiserv has all the qualities of a high-quality technology business that has gotten caught up in the general market sell-off. The company provides payment and financial services technology solutions. Wall Street is predicting a net profit of around $4.1 billion for the current year, putting the stock at a forward price-earnings ratio of 15. This seems cheap for a technology services provider, especially one that operates in the highly regulated financial sector.
Another notable acquisition in the portfolio was NortonLifeLock (NLOK, Financial). Baupost spent $150 million building a position in the company during the fourth quarter. Shares in the cybersecurity company are currently dealing at a forward price-earnings ratio of 16.8. The company has earned a return on capital employed of 28% over the past 12 months with an operating profit margin of 41%.
All of these businesses appear to fit the framework Klarman has developed as a value investor over the past couple of decades. He is always on the lookout for opportunities the market might have missed - companies that offer a unique product or service that the market is failing to take account of in its valuation of the business.
All three of the companies outlined above look cheap for tech companies, and while I have not dug into their competitive advantages, the high returns on capital suggest they offer something peers are unable to replicate.
