In this article, we take a look at the 10 safe stocks to buy in 2022 according to Seth Klarman. You can skip our detailed analysis of Seth Klarman’s 13F portfolio and go directly to 5 Safe Stocks to Buy According to Seth Klarman.
Seth Andrew Klarman is a billionaire hedge fund manager with a net worth of $1.5 billion as of the first quarter of 2022. He’s also the author of the widely acclaimed book, Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor. In the book, Klarman reflects on his philosophy of value-investing and criticizes momentum trading as a form of gambling.
Klarman manages the hedge fund Baupost Group with $30 billion in assets under management as of the first quarter of 2022. In February, 2022, he told clients in his investor letter that rising inflation and interest rates pose a serious risk to the stock market and the fund is hedging against outsized price gains in anticipation of a market downturn.
Baupost Group is primarily invested in technology, services, financial and healthcare sectors. Since 1983, the hedge fund has had an average annual return of over 20%. It returned 0.92% more in Q1, 2022 as compared to the previous quarter.
Seth Klarman is known for his cautious nature and his portfolio is well-hedged against the current market downturn due to Federal Reserve’s counter-inflationary rate hikes, totaling 75 basis points as of May, and the ongoing conflict in Ukraine which has added to soaring prices due to energy supply-chains disruption.
Investment Philosophy of Seth Klarman
Seth Klarman is a value-investor and is of the view that one should buy stocks which are trading at a discount (below their intrinsic value). He is very risk-averse and believes that diversification is one of the the most effective countermeasures against principal erosion.
“There are only a few things investors can do to counteract risk: diversify adequately, hedge when appropriate, and invest with a margin of safety.”
–Excerpt from Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor
In terms of diversification, Klarman states that the number of value-stocks you have to diversify in does not need to be huge and that as few as 10 to 15 different holdings should be enough. He is also of the view that diversification cannot protect an investment in a broader market downturn so hedging should be employed when appropriate by keeping short positions in the market as well.
What makes Klarman different from Buffett when it comes to bargain-buying is that while Buffett looks at good companies with reasonably discounted prices, Klarman demands a large margin of safety. Buying a stock at a large discount combines risk aversion (in case of a market decline) and potential for relatively high returns.
“It is precisely because we do not and cannot know all the risks of an investment that we strive to invest at a discount. The bargain element helps to provide a cushion for when things go wrong.”
–Excerpt from Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor
Klarman’s primary valuation metrics for value-stocks are Net Present Value, which is the discounted value of all future cash flows that a company is estimated to generate; Liquidation Value, which is the absolute worth of the company if it went out of business and its assets sold; and Stock Market Value, the value a stock would have if it traded at the same multiples as the broader market.
He remains somewhat skeptical of the Net Present Value metric as it is an attempt to predict the future and believes an investor should be absolutely conservative when using it.
“Unfortunately future cash flows are usually uncertain, often highly so. Moreover, the choice of a discount rate can be somewhat arbitrary. These factors together typically make present value analysis an imprecise and difficult task.”
–Excerpt from Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor, page, 122.
Since the hedge fund titan goes to great lengths to avoid loss, there are plenty of safe stocks to buy in 2022 according to Seth Klarman’s portfolio, like Intel Corporation (NASDAQ:INTC), Qorvo, Inc. (NASDAQ:QRVO) and Alphabet Inc. (NASDAQ:GOOG), in the backdrop of the current market crisis.
Seth Klarman of Baupost Group
Our Methodology
For our list of the 10 safe stocks to buy in 2022 according to Seth Klarman, we’ve selected stocks from his first quarter portfolio that can withstand the present macroeconomic turmoil. Our core metric is the Trailing Price to Earnings Ratio but we’ve ranked the stocks on the basis of Baupost Group’s stake value in them. We’ve also detailed other metrics to gauge financial health. These include solvency metrics like Debt to Equity Ratio as well as liquidity metrics like Quick Ratio.
10. Post Holdings, Inc. (NYSE:POST)
Baupost Group’s Stake Value: $26 million
Percentage of Baupost Group’s Stake Value: 0.28%
Number of Hedge Fund Holders: 36
P/E Ratio: 10.13
The number 10 on the list of safe stocks to buy in 2022 according to Seth Klarman is Post Holdings, Inc. (NYSE:POST). It is a consumer-packaged goods holding company. It operates in center-of-the-store, refrigerated and food ingredient categories and also markets convenient nutrition products.
On May 9, Post Holdings, Inc. (NYSE:POST) was resumed with a ‘Buy’ rating and a $92 price target at Citi by analyst, Wendy Nicholson. On the same day, Piper Sandler analyst, Michael Lavery raised his price target on Post Holdings, Inc. (NYSE:POST) to $96, up from $84 and kept an ‘Overweight’ rating on the shares.
Lavery remains bullish on the stock and updated his model to reflect a quicker recovery in food service margins, which drives his 2022 EBITDA estimate to the high-end guidance. The company beat consensus on both earnings and revenue by $0.04 and $51 million respectively.
As of the first quarter of 2022, 36 hedge funds are invested in Post Holdings, Inc. (NYSE:POST) with Route One Investment Company being the leading shareholder, owning equity worth $485 million. Baupost Group, on the other hand, owns $26 million worth of shares in the company.
Though it is not as big as Intel Corporation (NASDAQ:INTC), Qorvo, Inc. (NASDAQ:QRVO) and Alphabet Inc. (NASDAQ:GOOG), POST is certainly a safe stock.
Heartland Advisors brought Post Holdings, Inc. (NYSE:POST) to light in their Q1, 2021 investor letter. Here’s what they said:
“The run up in equity prices over the past several months has narrowed the pool of attractively valued businesses. Economically sensitive areas of the market, in particular, have seen valuations stretched—but the impact of investor exuberance is evident in share prices of companies throughout the broader market. In response, we continue to focus on finding and owning companies that are poised to succeed against a variety of backdrops or those that are priced at significant discounts to peers regardless of the sector or industry. Recent addition Post Holdings, Inc. (POST) is an example of the type of business we’ve found attractive.
Post manufactures and markets food products through five business lines including a breakfast cereals unit, a food service division, refrigerated retail products, and active nutrition. Shares of the company came under pressure due to the severe impact the COVID-19 economic shutdown had on its food service segment.
Additionally, investors were wary of the company’s use of debt given the uncertainty surrounding how long the economic pullback would last. The bear case against the stock, in our view, is overblown.
In recent years, Post has transformed itself into a higher-growth packaged food enterprise with a diversified portfolio that, taken as a whole, possesses superior growth and free cash flow characteristics vs. its peers. Despite this, shares sell at a meaningful discount to the peer group based on enterprise value/earnings before interest taxes depreciation and amortization, as well as our estimates of the company’s intrinsic value. As the economy returns to normal, Post’s food service line should rebound, and we believe investors will gain a greater appreciation of the company and its stock.”
9. Encompass Health Corporation (NYSE:EHC)
Baupost Group’s Stake Value: $213 million
Percentage of Baupost Group’s Stake Value: 2.29%
Number of Hedge Fund Holders: 48
P/E Ratio: 14.35
Encompass Health Corporation (NYSE:EHC) is one of the largest providers of post-acute medical services in 36 states in the US via its network of inpatient rehabilitation hospitals and hospice agencies. Baupost Group increased its shares in the company by 319% in Q1, 2022, acquiring 2.7 million more shares relative to the previous quarter and remains the leading stakeholder as of the first quarter of 2022.
Encompass Health Corporation (NYSE:EHC) outperformed consensus on earnings by $0.05 in Q1, 2022, with an EPS of $0.97. The company has a consensus ‘Buy’ rating based on 8 analysts’ estimates.
On June 8, RBC Capital analyst, Ben Hendrix lowered his price target on Encompass Health Corporation (NYSE:EHC) to $82, down from $85 but kept an ‘Outperform’ rating on the shares.
Hendrix told investors in a research note that Encompass Health’s lower consolidated guidance shows persistent labor cost headwinds, as well as bad debts, closer to the higher end of initial estimates weighing on EBITDA, but while the operating backdrop is not stabilizing as quickly as initially calculated, the management continues to anticipate significant improvement in the second half.
In the last quarter of 2021, Heartland Advisors had the following to say about Encompass Health Corporation (NYSE:EHC) in their investor letter:
“COVID complications. Shares of many Health Care companies lagged as the continuing threat of COVID-19 dampened demand for elective medical procedures and health care providers struggled to maintain adequate staffing in the face of burnout and resistance to vaccine mandates. The Strategy’s holdings in the sector trailed the benchmark average, and the group contained a key detractor, Encompass Health Corporation (EHC).
Encompass provides inpatient rehabilitation services as well as home-based health and hospice care. Both businesses enjoy a competitive advantage over many of their peers and, we believe, are well positioned to grow organically, and acquire smaller competitors that could further economies of scale.
A labor shortage has taken a toll on sales and profit margins at Encompass as the company struggles to fill positions in a challenging environment for nursing wages and availability. Revenues have also been hurt by a slowdown in elective surgeries performed, which results in a smaller pool of patients in need of rehabilitation services.
When we took a stake in Encompass late in the summer of 2020, we recognized that COVID-related headwinds could endure longer than anticipated. However, the team believes the current challenges will eventually fade as enhanced nurse recruiting outreach helps mitigate staffing pressures while COVID-19 containment and treatment efforts gain traction. With shares producing an 8% free cash flow yield and trading at just 9x 2022 enterprise value/earnings before interest, taxes, depreciation, and amortization, we believe our patience will be rewarded.”
8. Nexstar Media Group Inc. (NASDAQ:NXST)
Baupost Group’s Stake Value: $216 million
Percentage of Baupost Group’s Stake Value: 2.32%
Number of Hedge Fund Holders: 39
P/E Ratio: 7.87
Nexstar Media Group Inc. (NASDAQ:NXST) is one of America’s largest local television and media companies with over 200 broadcast stations. The company caters to over 68% TV households in the US.
Nexstar Media Group Inc. (NASDAQ:NXST) has 39 hedge funds invested in it as of the first quarter of 2022. The funds own a total of $1 billion in equity. Baupost Group is the lead investor with ownership of over 20% of this equity.
The consensus on the stock is ‘Buy’ based on 5 analyst ratings as of June 14, with a price target of $210, pointing to an upside of 27%. The company beat earnings’ estimates by $1.70 with an EPS of $6.01 in its Q1, 2022 results. Nexstar Media Group has a Quick Ratio of 2.02.
Nexstar Media Group Inc. (NASDAQ:NXST) is a dividend paying stock and has a dividend yield of 2.18% as of June 14. The company has been growing the dividend cash payout consecutively for 9 years.
With good liquidity, earnings, positive analyst estimates and dividend payouts, Nexstar is one of the safest stocks on the list of safe stocks to buy according to Seth Klarman.
Richie Capital Group brought Nexstar Media Group Inc. (NASDAQ:NXST) in discussion in their Q1, 2022 investor letter. Here’s what they said:
“Nexstar Media Group (NXST up 24.8%) – The television broadcasting and digital media company surged during the quarter after presenting at an investor conference where management pointed to a strong 2022 for both political advertising and retransmission. They have exposure to more than 80% of markets with competitive mid-term political races. NXST is developing new ad categories such as sports betting and they are focused on expanding digital ad revenue and providing digital solutions to local advertisers. Auto advertising will return in the fall as auto dealerships re-enter the market to sell their replenished inventory.”
7. Micron Technology, Inc. (NASDAQ:MU)
Baupost Group’s Stake Value: $242 million
Percentage of Baupost Group’s Stake Value: 2.6%
Number of Hedge Fund Holders: 78
P/E Ratio: 7.43
Micron Technology, Inc. (NASDAQ:MU), as the name implies, is a technology company but its P/E ratio is relatively far more impressive at 7.43. As if that was already not enough, the company’s dependence on debt is a paltry 15% of its dependence on its own equity. A Quick Ratio of 2.33, on the other hand, covers any short term debt obligations with ease.
Micron Technology, Inc. (NASDAQ:MU) has a ‘Buy’ consensus based on 26 analyst ratings as of June 14. The consensus price target, on the other hand, is $113 which implies an upside of 92.58%. On June 13, UBS analyst Timothy Arcuri lowered his price target on Micron Technology, Inc. (NASDAQ:MU) to $115 from $120 but kept a ‘Buy’ rating on the stock and continues to view it as his “top idea in semis”.
Arcuri said that while the end-market weakness in PC/smartphones is weighing somewhat on short-term DRAM average selling prices, he anticipates very strong pricing support heading into the year 2023 as the industry growth in bit supply is set to compress quite significantly.
Micron Technology, Inc. (NASDAQ:MU) is an important technology stock in Klarman’s latest portfolio in addition to Intel Corporation (NASDAQ:INTC), Qorvo, Inc. (NASDAQ:QRVO) and Alphabet Inc. (NASDAQ:GOOG).
In their Q3, 2021 investor letter, Hazelton Capital Partners discussed Micron Technology. Here is what the letter said:
“It’s hard to explain how shares of Micron Technology (NASDAQ:MU), manufacture of DRAM and NAND semiconductor chips, can fall during a global chip shortage. In most industries, focusing on demand can give you a clear insight into what lays ahead for a company. Today, the memory and storage chip industry is no different. However, in the past, companies focused on market share led to the reckless build out of chip fabrication plants (FABs), oversupply, falling average selling prices (ASPs) of memory and storage chips, lower margins, and declining cash flows. As the industry consolidated – there are now just 3 major producers of DRAM and 5 on the NAND side – rational behavior among the key players began to take hold as competitors began focusing more on R&D. Currently, chip pricing remains cyclical although less so than in the past and that cyclicality has a long-term upward bias. The ongoing transition to newer and more robust platforms (3D 176-layer NAND & 1-Alpha node DRAM) has provided the memory and storage chip industry with improved supply capacity under its current manufacturing footprint, ultimately pressuring ASPs. Over the past three years, as most of the large platform conversions have already taken place, being able to add more bits per wafer has reached a saturation point. With no major FAB build outs planned in the near-term by competitors Samsung or SK Hynix, constrained supply and flattening cost curves should lead to durable and upward sloping ASPs once the recent volatility from the chip shortage subsides.
Currently Micron Technology (NASDAQ:MU) trades at just 8x 2022 estimate earnings. Micron Technology (NASDAQ:MU) is expecting growth in both DRAM and NAND not just from the supply of more chips to data centers, artificial intelligence, the auto sector, and mobile devices, but also from greater demand for gigabyte capacity per unit within those segments. With a healthy balance sheet, improving return on invested capital, and expanding cash flows, not only should Micron benefit from improving future earnings but its multiple should also reflect the transition to a flattening cost curve.”
6. Willis Towers Watson Public Limited Company (NASDAQ:WTW)
Baupost Group’s Stake Value: $290.7 million
Percentage of Baupost Group’s Stake Value: 3.12%
Number of Hedge Fund Holders: 49
P/E Ratio: 6.86
Willis Towers Watson Public Limited Company (NASDAQ:WTW) is a multinational insurance brokerage and advisory service. As of Q1, 2022, 49 hedge funds have invested over $2 billion in the company, with First Eagle Investment Management owning an equity of $1.13 billion alone.
The debt that the company has incurred as of first quarter of 2022 to finance its operation is only 36% of its total equity and is well within the reasonable range. Willis Towers Watson Public Limited Company (NASDAQ:WTW) had a Quick Ratio of 2.20 as of the same quarter. The firm beat consensus on earnings by $0.16 in its first quarter results, with an EPS of $2.66.
On May 26, Willis Towers Watson Public Limited Company (NASDAQ:WTW) announced that its board approved a raise in the existing share repurchase authority in the amount of $1 billion. The $1 billion increase is in addition to the roughly $1.3 billion remaining on the current open-ended repurchase authority. The stock has a consensus ‘Hold’ rating based on 4 analysts as of June 14 with a consensus price target of $236.7.
Artisan Partners dedicated a portion to Willis Towers Watson Public Limited Company (NASDAQ:WTW) in their Q4, 2021 investor letter titled, “Artisan International Value Fund”. Here is what it said:
“During the quarter, we made meaningful new investments in two UK domiciled companies, (one of which is) Willis Towers Watson (WTW). Long-term investors will recognize Willis Towers Watson since it was in the portfolio from 2018 to early 2021. We exited that investment after WTW agreed to merge with Aon. Unfortunately for WTW and Aon, that proposed merger was rejected by the US Department of Justice in July 2021. In fact, there is significant market power in this industry, which is what makes it a great business. That market power is exerted not with the insurance brokers’ corporate customers, but with their suppliers (insurance underwriters). We were surprised at Aon’s attempted merger, and our concerns regarding antitrust approval encouraged us to sell.
WTW operates two businesses: insurance brokerage and HR consulting. Both are market-leading with attractive financial profiles and mostly recurring revenue streams. Despite these strengths, WTW operates with lower margins versus peers. The margin opportunity is most pronounced in the insurance brokerage business. Management has slowly increased the insurance brokerage margin over time, but a large gap remains with best-in-class peers like Marsh & McLennan and AJ Gallagher. Management presented a plan to increase the insurance brokerage business’s margins by 5% by year-end 2024. This plan follows the outline other insurance brokers have previously used to increase their margins—giving us confidence the targets are achievable.
The merger’s demise brought a new and experienced CEO, a new CFO and a refreshed shareholder-aligned board of directors. In addition, the merger’s cancellation transformed the company’s financial position. As part of the agreement, Aon paid WTW a $1 billion “break fee.” WTW also sold a re-insurance brokerage business for $3.25 billion along with the potential to earn $750 million through an earnout agreement. With the proceeds, WTW expects to repurchase approximately $4 billion of stock between the second half of 2021 and the end of 2022. With existing cash on hand and cash generation over the next three years, we estimate the company can return another $6 billion to shareholders through dividends and share repurchases representing over 20% of today’s market capitalization. We forecast earnings of approximately $20 per share in 2024—a price to earnings (P/E) ratio of 11.5X. We believe that valuation significantly undervalues this high-quality business.”
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Disclosure: none. 10 Safe Stocks to Buy in 2022 According to Seth Klarman is originally published on Insider Monkey.
