Seth Klarman (Trades, Portfolio) is a legendary value investor who is the portfolio manager at The Baupost Group, an investment firm with $9.27 billion in its 13F portfolio as of the end of the first quarter. The 13F portfolio consists of 54 stocks.
Klarman follows strict value investing criteria, which he detailed in his famous book “Margin of Safety." Thus, let's take a closer look at the top two holdings in Klarman's equity portfolio, which have a weight of approximately 24% in total, to see if they could be value opportunities today.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
1. Liberty Global PLC
Liberty Global PLC (LBTYK) is a broadband internet and mobile communications holding company which owns a variety of well known brands. These include Virgin Media-O2 in the UK, VodafoneZiggo in the Netherlands, Telenet in Belgium and more listed below. It has a 10.56% weight in Klarman's equity portfolio. Klarman last added to this position in the third quarter of 2019 at an average price of $26 per share.
Source: Liberty Global investor materials
On Sept. 22, 2021, Liberty Global entered into an agreement to sell 100% of UPC Poland. This sale closed by the end of the first quarter of 2022.
Liberty Global also has an investment arm called “Liberty Global Venture." This arm has investments in over 75 companies and funds in content, technology and infrastructure. In addition, it has stakes in leading companies such as ITV PLC (LSE:ITV, Financial) (one of the major TV providers in the U.K.), Lions Gate Entertainment (LGF.A, Financial) and even the Formula E racing series.
In the first quarter of 2022, Liberty Global produced revenue of $3.4 billion, which was pretty close to the $3.49 billion produced in the first quarter of 2021. The lion's share of the revenue comes from Mobile and Fixed Broadband, followed by B2B Fixed.
The company has noted its ability to raise prices to adjust for inflation, which is a significant bonus during the high inflation environment we live in. However, I wouldn’t expect this to be able to be done indefinitely, mainly due to competition from video on demand services such as Netflix (NFLX, Financial), which are significantly cheaper than many broadband packages and are moving towards cheaper ad-funded services.
In Postpaid Mobile, O2 posted a strong quarter despite the price rise, which is a positive. The Sunrise UPC Broadband segment saw strong growth supported by Yallo full service offerings.
U.S. GAAP adjusted Ebitda increased slightly to $1.395 billion, up by 6% from the $1.48 billion generated in the first quarter of 2021. This increase was driven by cost savings and synergies between divisions.
Liberty Ventures (the investment arm) saw a $100 million decline in portfolio value to $3.4 billion, which was mainly driven by a decline in ITV’s share price.
The company has a levered but manageable balance sheet with $3 billion in cash and short term investments in addition to $16.4 billion in long term total debt. Just $1 billion of this is in current debt (due within the next two years) and thus seems manageable.
In terms of valuation, the GF value line indicates an intrinsic value estimate of $20 per share, which gives it a rating of fairly valued at the time of writing.
2. Qorvo
% of Klarman's Portfolio: 8.89%
Qorvo (QRVO, Financial) is an U.S.-based semiconductor company which designs and manufactures radio frequency (RF) systems for applications in wireless and broadband communication. This technology has many applications, which include cell phones, Wifi, IoT (Internet of things) and 5G. Klarman owns approximately 6.13% of the company's shares outstanding at the time of writing and was adding to his position in the first quarter of 2022 at an average price of $135 per share.
The global 5G market is forecasted to grow at a blistering 52% compounded annual growth rate (CAGR) between 2022 and 2030, reaching $1.67 trillion by 2030 according to estimates from Grand View Research.
Qorvo has an elite customer base of well established players, but it should be noted that Apple (AAPL, Financial) makes up 33% of revenue and Huawei makes up 10% of revenue. Such high customer concentration can be both a blessing and a curse.
Much like Warren Buffett (Trades, Portfolio), Klarman aims to invest into companies with a moat. Qorvo has a plethora of patents, nearly 2,000 which expire between 2020 and 2040, which is a positive sign for a business moat.
Gurus have mostly been buying and selling the stock in equal measure for the past couple of years:
I believe Qorvo is well positioned to deal with the supply chain constraints experienced by many semiconductor companies. It has a diversified range of facilities with primary wafer fabrication factories in Texas, Oregon and North Carolina, in addition to international test facilities in China, Germany and Costa Rica.
For the quarter ending April 2022, revenue was $1.166 billion, up 16% from $1 billion in the prior-year period. Gross profit jumped by 8% to $573 million, up from $528 million in the prior-year quarter. Operating profit was $338 million, which represented an increase of 5.6% year over year.
This growth was driven by a “multi million dollar” order for a circuit protection solution for EV charging stations. The Biden Administration has recently announced a staggering $7.5 billion for EV charging infrastructure, thus this could be a significant tailwind for the company moving forward.
The company also has seen strong demand from Korea for its WiFi 6E (latest Wifi standard) and power management solutions for 5G smartphones, which also could be a significant tailwind given the industry growth.
Qorvo has a strong balance sheet with $975 million in cash and short term investments and just $800,000 in current debt. However, it should be noted that total long term debt is ~$2 billion, which is high but manageable.
In terms of valuation, the GF Value line indicates a fair value of $173 per share, which means the stock is significantly undervalued at the time of writing.
Final thoughts
Seth Klarman (Trades, Portfolio) is a true value investor, but it is clear from his top portfolio holdings that he has a penchant toward technology stocks and even those with a growth element.
