Seth Klarman (Trades, Portfolio), value investor and portfolio manager of the Baupost Group, invests in an eclectic variety of investments from traditional equities to more esoteric investments, including distressed debt, liquidations and bonds.
Occasionally, the Baupost Group manager will abstain from investing and simply hold cash. During the third quarter, Klarman removed four positions from his portfolio: EMC Corp. (EMC, Financial), Citigroup Inc. (C, Financial), Avis Budget Group Inc. (CAR, Financial) and SunEdison Semiconductor Corp. (SEMI, Financial).
EMC
Klarman sold all 56,961,725 shares of EMC at an average price of $28.27 per share. With this transaction, the guru knocked off 21.12% of his portfolio.
The Massachusetts computer hardware company has a fairly robust financial outlook with a financial strength rank of 6 and a predictability rank of 4.5 stars. Even though the company has modest Piotroski F-scores and Altman Z-scores, EMC’s operating margin outperforms 84% of global data storage companies.
On Sept. 7, Dell Technologies Inc. (DVMT, Financial) made the historic acquisition of EMC, creating “the world’s largest privately controlled tech company” as mentioned in the press release. The acquisition enables Dell Technologies to compete in the vastly changing Internet of Things.
As the company merged with Dell Technologies, gurus eliminated their positions in EMC, likely to avoid losing capital in the event of EMC being delisted. With the proceeds of the EMC trade, Klarman purchased 6,652,459 shares of Dell Technologies at an average price of $46.83.
Citigroup
The Baupost Group portfolio manager sold his 5.167 million-share stake of Citigroup at an average price of $45.49 per share, paring his portfolio by about 3%.
Citigroup has a financial strength rank of 5, suggesting a satisfactory business operation. The global bank has a cash-debt ratio of 0.65, which underperforms 70% of competitors. Based on its Beneish M-score of 3.31, Citigroup likely manipulated its earnings results.
The global bank reported weaker earnings for the third quarter compared to the prior-year quarter. Revenues and diluted earnings per share decreased 4% and 5%, and net income decreased about $500 million.
Citigroup’s operating margin underperforms 53% of global banks, and its per-share revenue has declined 2% per year in the past five years. As the company has low growth potential, several gurus have trimmed or eliminated their Citigroup stakes. Louis Moore Bacon (Trades, Portfolio) and Leon Cooperman (Trades, Portfolio) sold about 1.5 million shares and 828,318 shares.
Avis Budget Group
Klarman sold his 1,787,227-share stake in Avis, a global car rental company. The stock price averaged $36.22 per share during the quarter.
Avis has a profitability rank of 8, implying high and sustainable profitability in the short term. The company reported strong third-quarter earnings performance, including a 3% increase in revenue and a 14% increase in net income from the prior-year third quarter. CEO Larry De Shon lauded the company’s efforts to promote profitable driving initiatives, which resulted in the top quarterly adjusted EBITDA margin in the company’s history.
Although the company has high profitability, Avis has poor financial strength. The company’s cash-debt ratio and interest coverage underperform over 75% of global rental and leasing services companies with the former near a 10-year low. Additionally, the company’s interest coverage seldom climbed above Ben Graham’s required threshold of 5 during the past 10 years.
Among the gurus that own shares in Avis, Larry Robbins (Trades, Portfolio) and Diamond Hill Capital (Trades, Portfolio) have the largest two stakes in the company. The latter trimmed its Avis position by 11.41%.
SunEdison
The Baupost Group manager eliminated his stake in SunEdison, selling 8,372,979 shares at an average price of $8.96 per share. The guru realized an estimated loss of 53% with SunEdison as the stock price steadily declined since the second quarter of 2015.
The silicon wafer manufacturing company has poor financial strength and profitability, the latter ranking just 3 out of 10. SunEdison reported weak third-quarter earnings. Although the company’s operating losses slightly improved from the second quarter to the third quarter, SunEdison’s adjusted EBITDA decreased about $3.3 million during the third quarter.
Based on its low Piotroski F-score and Altman Z-score, SunEdison remains in financial distress. The company filed for Chapter 11 bankruptcy earlier in 2016.
See also
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Disclosure: The author has no position in the stocks mentioned in this article.
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