In this article, we discuss the 3 interesting stocks in Seth Klarman’s 2022 portfolio. If you want to read our detailed analysis of Seth Klarman’s investment strategy and hedge fund performance, go directly to 8 Interesting Stocks in Seth Klarman’s 2022 Portfolio.
3. Encompass Health Corporation (NYSE:EHC)
Percentage of Baupost Group’s 13F portfolio: 2.29%
Value of Baupost Group’s Stake: $213.33 million
Number of Hedge Fund Holders: 48
Encompass Health Corporation (NYSE:EHC) deals in the provision of post-acute healthcare services through its segments: Inpatient Rehabilitation, and Home Health and Hospice. Baupost Group increased its stake in the company by 319% in the first quarter, standing at 3 million shares worth $213.3 million. In contrast, the fund held 716,000 shares of Encompass Health Corporation (NYSE:EHC) a quarter earlier.
On April 7, Truist analyst David MacDonald reiterated a ‘Buy’ rating on Encompass Health Corporation (NYSE:EHC) shares, and raised the price target to $85 from $78. He maintains a positive stance on the underlying demand drivers and attractive tailwinds for the healthcare services industry, with the dissipating effects of Covid helping alleviate labor pressures and driving robust cash flows.
For Q1 2022, Encompass Health Corporation (NYSE:EHC) disclosed earnings per share of $0.97, above estimates by $0.05. The company recorded a revenue of $1.33 billion for the quarter, exceeding market estimates by $8.68 million. As of June 13, the company offers a 1.99% dividend yield to shareholders, with a dividend-paying history stretching back to 2013.
Heartland Advisors highlighted several stocks in its Q4 2021 investor letter, and Encompass Health Corporation (NYSE:EHC) was one of them. The fund said:
“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.”
2. Willis Towers Watson Public Limited Company (NASDAQ:WTW)
Percentage of Baupost Group’s 13F portfolio: 3.12%
Value of Baupost Group’s Stake: $290.77 million
Number of Hedge Fund Holders: 49
Willis Towers Watson Public Limited Company (NASDAQ:WTW) is a London-based financial services company which operates through its segments: Health, Wealth & Career, and Risk & Broking.
At the end of May, Willis Towers Watson Public Limited Company (NASDAQ:WTW) approved a $1 billion increase in its share buyback program, which will be in addition to the nearly $1.3 billion remaining on the current open-ended repurchase authority. On May 19, Raymond James analyst C. Gregory Peters removed Willis Towers Watson Public Limited Company (NASDAQ:WTW) from the firm’s “Analyst Current Favorites” list, but maintained a ‘Strong Buy’ rating on the shares with a $270 price target.
For the first quarter, Willis Towers Watson Public Limited Company (NASDAQ:WTW) posted a revenue of $2.16 billion, underperforming estimates by $74.21 million. However, EPS of $2.66 came in above Street forecasts by $0.16.
According to regulatory filings for the first quarter, Seth Klarman owned a $290.8 million stake in Willis Towers Watson Public Limited Company (NASDAQ:WTW) consisting of 1.23 million shares. This took up 3.12% of the fund’s overall portfolio. The firm’s largest Q1 shareholder was First Eagle Investment Management with a $1.13 billion stake.
Out of all the hedge funds tracked by Insider Monkey, 49 reported ownership of stakes in Willis Towers Watson Public Limited Company (NASDAQ:WTW) at the end of the first quarter with a collective price tag of $2.18 billion. This is down from 66 hedge funds a quarter earlier.
Here is what Artisan Partners, an investment management firm, had to say about the prospects and valuation of Willis Towers Watson Public Limited Company (NASDAQ:WTW) in its Q4 2021 investor letter:
“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 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.”
1. Veritiv Corporation (NYSE:VRTV)
Percentage of Baupost Group’s 13F portfolio: 5.11%
Value of Baupost Group’s Stake: $476.17 million
Number of Hedge Fund Holders: 19
Veritiv Corporation (NYSE:VRTV) is an Atlanta-based B2B provider of packaging, publishing and hygiene products, with approximately 125 distribution centers spread across the United States, Mexico and Canada. Seth Klarman, according to his Q1 portfolio, owned a $476 million stake in Veritiv Corporation (NYSE:VRTV) consisting of 3.56 million shares.
As of June 13, Veritiv Corporation (NYSE:VRTV) has seen its shares climb 115.26% in the last 12 months, and 7.76% in the year so far. The firm enjoys strong pricing power for its products/services, and looks set to grow its revenue given its dominant position in the product packaging industry.
For the quarter ending March, Veritiv Corporation’s (NYSE:VRTV) revenue was recorded at $1.86 billion, up 19.16% from the year-ago quarter and above analysts’ forecasts by $86.7 million.
Out of all the hedge funds tracked by Insider Monkey, 19 reported bullish bets on Veritiv Corporation (NYSE:VRTV) at the end of the first quarter, with aggregate positions worth $549.6 million. This is in comparison to 20 hedge funds a quarter earlier with $511.7 million worth of stakes in the company.
