Seth Klarman (Trades, Portfolio), who is arguably one of the best value investors alive today, had a busy second quarter. The billionaire owner of hedge fund Baupost Group made several large position changes during the period, some of which are surprising.
The most significant position change – regarding dollars spent—was an increase in Baupost’s ownership of Synchrony Financial (SYF, Financial).
The largest change
Klarman originally initiated his Synchrony position at the end of last year, and surprisingly cut the holding during the first quarter of 2017. The Synchrony position was reduced by 14.5%, which seemed at the time to be an admission from Klarman he had made a mistake. Indeed, shortly after the end of the first quarter, Synchrony, which provides white label store card services, issued a terrible first-quarter earnings report, which prompted the stock to lose around a fifth of its value in one day.
The company, which operates as a private label card issuer for store cards offered by Wal-Mart (WMT, Financial), JC Penney (JCP, Financial) and Lowe's (LOW, Financial), to name a few, reported a 14% decline in net profit year over year for the first quarter as loan losses increased markedly. Net charge-offs grew to roughly 5.3% of loans on an annualized basis, up from about 4.7% last year, while loans more than 30 days past due rose to 4.25%, up from 3.85%. Off the back of these figures, the company recorded $1.3 billion of loan loss provisions, up 45% year over year.
It seems these numbers did little to put off Baupost, however. According to the firm's 13F at the end of the second quarter, the fund continued to hold the position and had increased the holding by 66%.
This fresh buying means Synchrony now constitutes 10% of Baupost’s equity portfolio, making it the second-largest position behind Cheniere Energy (LNG, Financial) at 11.6% of equity assets. It is not clear what Klarman sees in Synchrony, but with a position that is now worth just under $875 million, it is clear he believes the business is undervalued.
Portfolio movements
Other moves the billionaire made during the quarter were to reduce Cheniere Energy by 4.6%; boost Qorvo (QRVO, Financial) by 25.3%; add to Antero Resources (AR, Financial) by 46%; add to Express Scripts (ESRX, Financial) by 108%; add to Cardinal Health Inc. (CAH, Financial) by 97.1% and add to Forward Pharma A/S (FWP) by 14.2%.
As well as adding to some existing positions, Klarman also initiated new positions in Avis Budget Group Inc. (CAR), Spirit Realty Capital Inc. (SRC) and Silver Run Acquisition Corp. (SRUN). So it seems he is still finding value in today’s market.
Interestingly, Silver Run is another special purpose acquisition vehicle, and the holding here takes Klarman's interests in such groups to around 1.2% of Baupost’s equity portfolio. In addition to Silver Run, he also owns Conyers Park Acquisition Corp. (CPAAU)  and Saban Capital Acquisition Corp. (SCACU) with exposure through both stock and warrants. The largest disposal he made during the period, as a percentage of the total position, was a 72% reduction in American International Group (AIG) warrants. Klarman no longer sees value here.
Large buying
Aside from the large Synchrony add, I think the most exciting position adds for Klarman during the second quarter were Express Scripts and Cardinal Health. Both companies have been marked down significantly year to date as health care reform has stalled.
Over the last eight months, shares in these companies have fallen 11.9% and 7% respectively, underperforming the S&P 500, which has returned 7.8% over the period. These declines have left these health care companies trading at historically low valuations. For example, Express Scripts is trading at a forward price-earnings (P/E) ratio of 8.2 compared to the five-year average of 19.2 and sector average of 16.
Meanwhile, Cardinal Health is trading at a forward P/E of 13.3 compared to the industry average of 16 and EV/EBITDA ratio of 8.8 compared to the industry median of 10.9. Even though potential health care reform may pose some headwinds to these companies, considering the low valuations attached to the shares, they may be worth further research. Klarman certainly sees value here.
Disclosure: The author owns no stock mentioned.
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