Followers watch stealthy investor Seth Klarman (Trades, Portfolio)’s every rare public move for indication of his thoughts on market valuation, attractive assets spaces and the future of the economy. Often called “the next Warren Buffett (Trades, Portfolio),” he is known for buying temporarily snubbed or troubled stocks with a “margin of safety” between price and value, unlike Buffett, who prefers high-quality, fair-priced stocks. In the first half of this year, Klarman has placed almost a quarter of his portfolio into the lagging health care sector, among the highest levels of the past decade.
Klarman’s hedge fund, the Baupost Group in Boston, had 23% of the equity portfolio in health care in the second quarter and 24.02% in the first quarter, making it the second-biggest sector represented. It last reached similar percentages in the fourth quarter of 2016, at 23.58%, and before that in the second quarter of 2014, at 28.02%.
Its pilloried position at the heart of a political debate as to whether the U.S. should move to a single-payer system has weighed on the health care sector’s performance. Its future in question, health care returned just 5.87% so far this year as measured by the Health Care Select Sector SPDR (XLV, Financial). The gain ranks as the weakest in a robust year in which the S&P 500 index has soared 19.71% and the best group, technology, advanced 31.2%.
Many attributes may still draw the fundamentals-focused investor to the sector as the market devalues it. Charles Schwab, which has an outperform rating on health care, said in a note on Aug. 29 that it expects stock-price volatility ahead due to policy uncertainty in Washington but that companies in the sector are strong.
“In our view, the health care sector still has a lot of positives going for it,” analyst Brad Sorensen wrote. “Balance sheets are solid, stocks in the group generally have good dividend yields, and the overall cost structure appears to be much improved. Also, demand appears to be on the rise for health care products and services, partly as a result of an aging population.”
Klarman’s concentrated equity portfolio lists only 30 positions, with a value of $10.73 billion. As of the end of the June quarter, he has made the largest health care bets on: Allergan PLC (AGN, Financial), Bristol-Myers Squibb Co. (BMY, Financial) and McKesson Corp. (MCK, Financial).
Klarman owns 3,679,540 shares of Allergan PLC as of most recent filings, giving the holding a 5.74% weight in his portfolio. He has held shares since the first quarter of 2016, and he reduced the position by 22.86% in the second quarter of 2019.
Botox-maker Allergan agreed to be acquired by AbbVie Inc. on June 25 for $188 per share in cash and stock. GuruFocus estimates Klarman’s buy price around $223 per share (based on quarterly average prices). Allergan’s share price closed at $166.35 Thursday and has gained 22.05% year to date.
Bristol-Myers Squibb Co. (BMY, Financial)
Bristol-Myers Squibb composes 5.5% of Klarman’s portfolio as his second-biggest health care position. He increased the holding 225% to 13 million shares in the second quarter after starting the position in the previous quarter. The stock closed at $49.61 Thursday, down 6.08% year to date and 19% over the past year.
Bristol-Myers Squibb, a global biopharmaceutical company, creates drugs to treat cancer and heart diseases, among others. For the second quarter, the company reported a 10% increase in revenues to $6.3 billion, driven by double-digit gains in sales of its drugs Eliquis and Opdivo. Earnings were $1.4 billion, or 87 cents per share, compared to $373 million, or 23 cents per share, in the same period a year earlier. On Aug. 26, Bristol-Myers Squibb announced it would acquire Celgene, a biotech company focused on cancer and inflammatory disorders.
McKesson Corp. (MCK, Financial)
Klarman decreased his McKesson Corp. position by 7.82% in the second quarter to 2,595,011 shares. The holding represented 3.25% of the portfolio, making it his third-largest health care holding. He started the position in the fourth quarter of 2016 when the price averaged $147. GuruFocus estimates his average buy price around $141 per share. Shares closed at $146.10 Thursday, up 31.36% for the year to date and 14.6% for the past year.
McKesson, the largest health care company in the U.S., distributes pharmaceuticals to hospitals and offers other health care services. For its fiscal first quarter ended June 30, McKesson reported a 6% increase in revenues to $55.7 billion, with declines in two if its four segments, European Pharmaceutical Solutions and Other remaining businesses, which includes McKesson Canada and McKesson Prescription Technology Solutions.
McKesson raised its earnings per share guidance for its fiscal year 2020 to a range of $14.00 to $14.60, from a previously expected range of $13.85 to $14.45.
See Seth Klarman (Trades, Portfolio)’s portfolio here.
