Seth Klarman (Trades, Portfolio), portfolio manager of the Baupost Group, disclosed this week that during the third quarter, he exited his holding in Allergan Inc. (AGN, Financial) and introduced three new positions: Nuance Communications Inc. (NUAN, Financial), Vista Oil & Gas SAB de CV (VIST, Financial) and Cars.com Inc. (CARS, Financial).
The founder of the Boston-based fund received an economics degree at Cornell University and an MBA at Harvard University. Klarman, who published the book “Margin of Safety,” invests in a wide range of securities, including common stock, distressed debt, liquidations, foreign exchanges and bonds. The Baupost manager cautions that investing is more than just producing absolute returns: Investors often ignore the risks to produce absolute returns.
As of quarter-end, Baupost’s $8.5 billion equity portfolio contains 31 stocks with a turnover rate of 6%. The top three sectors in terms of portfolio weight are communication services, technology and health care.
Sold out: Allergan
Klarman sold 3,679,549 shares of Allergan, trimming the equity portfolio 5.74%. Shares averaged $162.97 during the quarter. The position was Klarman’s sixth-largest holding in the prior quarter.
North Chicago, Illinois-based AbbVie Inc. (ABBV, Financial) announced on June 25 it had entered a definitive agreement to acquire the Dublin, Ireland-based drug manufacturer in a cash-and-stock transaction worth $63 billion based on AbbVie’s closing price of $78.45 on June 24. On Tuesday, AbbVie announced the pricing of $30 billion in senior unsecured notes to fund a portion of the aggregate cash consideration due to Allergan shareholders in connection with the acquisition and to pay related fees. AbbVie also mentioned that if the merger does not close by Jan. 30, 2021, or announces the termination of the merger, AbbVie must redeem the notes outstanding at a special mandatory redemption price equal to 101% of the aggregated principal, plus any accrued interest up to the mandatory redemption date.
The above suggests that AbbVie expects to fund a portion of the acquisition through new debt, undermining the “no financing condition” requirement from John Paulson (Trades, Portfolio)’s merger-arbitrage checklist. Additionally, Allergan’s profitability rank of 5, on the heels of margins and returns underperforming over 60% of global competitors, raises concerns to the “solidly-performing target” criterion.
Other gurus that sold out of Allergan include First Eagle Investment (Trades, Portfolio) and the Vanguard Health Care Fund (Trades, Portfolio).
Nuance
Klarman purchased 8,245,456 shares of Nuance, giving the stake 1.40% weight in the equity portfolio. Shares averaged $14.37 during the quarter.
The Burlington, Massachusetts-based company provides voice and language solutions for businesses and consumers around the world. GuruFocus ranks Nuance’s financial strength 4 out of 10 on several weak signs, which include debt ratios that underperform over 80% of global competitors. Despite this, Nuance has a perfect Piotroski F-score of 9.
Vista Oil & Gas
Klarman purchased 6.175 million shares of Vista Oil & Gas, giving the position 0.38% weight in the equity portfolio. Shares averaged $6.20 during the quarter.
GuruFocus ranks the Mexican energy company’s financial strength 4.6 out of 10: Although the debt ratios outperform over 88% of global competitors, Vista Oil & Gas’ interest coverage ratio is lower than Benjamin Graham’s safe threshold of five and underperforms 73.79% of global competitors.
Cars.com
Klarman purchased 3 million shares of Cars.com, giving the holding 0.32% weight in the equity portfolio. Shares averaged $13.54 during the quarter.
The Chicago-based company operates several online websites for the buying and selling of new and used vehicles. According to GuruFocus, Cars.com’s profitability ranks 7 out of 10 on the heels of expanding profit margins and a Joel Greenblatt (Trades, Portfolio) return on capital that outperforms 97.39% of global competitors.
Disclosure: No positions.
Read more here:
- Bridgewater’s Top 5 New Buys in the 3rd Quarter
- First Eagle Buys 5 Companies in 3rd Quarter
- Francisco Garcia Parames’ Top 5 Buys of the 3rd Quarter
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