Billionaire Seth Klarman’s Picks Beat the Market in Q1

Seth Klarman‘s Baupost Group is one of the largest hedge funds in the world, with about $27 billion in assets under management. The fund posted a small loss in 2015, but our calculations show that its stock picks performed well in the first quarter of this year. The weighted average returns of the firm’s 18 holdings in companies with a market capitalization of at least $1.00 billion came in at 2.9% during the quarter, based on the size of those positions at the beginning of the period. This compares very favorably to the less than 1% gain posted by the S&P 500 index during the same period. Let’s take a look at some of the stocks that were responsible for the most volatility in Baupost’s portfolio during the quarter.

Our research determined that following the small-cap stocks that hedge funds are collectively bullish on can help a smaller investor beat the S&P 500 by around 95 basis points per month (see more details here).

#5 Theravance Biopharma Inc (NASDAQ:TBPH)

 – Shares Owned by Baupost Group (as of December 31): 6.42 Million

 – Value of Holding (as of December 31): $105.22 Million

Baupost’s Theravance holding was left unchanged during the fourth quarter at 6.42 million shares. The stock price of the $802 million biopharmaceutical company shot up by more than 20% during the first three months of 2016, making it one of the top performers in the fund’s portfolio. In its recently released financial results for the quarter ending December 31, Theravance Biopharma Inc (NASDAQ:TBPH) posted a net loss of $1.23 per share, which was $0.39 ahead of estimates, while quarterly revenue of $3.89 million marked a 172% increase on a year-over-year basis. The company also recently sold 1.3 million shares to Glaxo Group Limited, which held a 22% stake in the company at the end of last year. Neil Woodford‘s Woodford Investment Management significantly boosted its stake in Theravance Biopharma Inc (NASDAQ:TBPH) during the October-to-December period, to 5.06 million shares.

#4 Twenty-First Century Fox Inc (NASDAQ:FOXA)

 – Shares Owned by Baupost Group (as of December 31): 4.10 Million

 – Value of Holding (as of December 31): $111.29 Million

Another one of Baupost’s unchanged holdings, Twenty-First Century Fox posted modest gains of 5.27% during the first quarter. While concerns about the media market in the U.S continue to linger, Twenty-First Century Fox Inc (NASDAQ:FOXA) is gaining serious ground in India through its Indian subsidiary Star India, which has doubled its market share to 23% in the last five years. The subsidiary is expected to hit $500 million in EBITDA by 2018 and $1.00 billion by 2020. Recently, Twenty-First Century Fox expanded the role of Star India’s chief executive Uday Shankar to include that of Chairman. Jeffrey Ubben‘s ValueAct Capital owns about 47.33 million shares of Twenty-First Century Fox Inc (NASDAQ:FOXA) as of December 31.

Three more of Mr. Klarman’s top stock picks are studied on the next page.

#3 Paypal Holdings Inc (NASDAQ:PYPL)

 – Shares Owned by Baupost Group (as of December 31): 11.11 Million

 – Value of Holding (as of December 31): $402.16 Million

The $47 billion online payments company, which recently cancelled a $3.6 million project in North Carolina owing to the state’s anti-gay law that allows businesses to discriminate against gays and lesbians, saw its stock price surge by 8.8% during the first quarter. Baupost inched up its stake in Paypal Holdings Inc (NASDAQ:PYPL) by 1% during the final three months of 2015, with the stock ranking as its sixth-largest position. Piper Jaffray’s Gene Munster recently reiterated his ‘Underweight’ rating on PayPal, and has a price target of $33 on the stock, which is 14% lower than its current value. The analyst believes that there is very little chance that the company will be acquired, while it continues to face headwinds, including from competition such as Apple Pay, which recently launched on mobile sites. Activist investor Carl Icahn‘s Icahn Capital is another major shareholder of Paypal Holdings Inc (NASDAQ:PYPL), owning about 46.27 million shares.

#2 EMC Corporation (NYSE:EMC)

 – Shares Owned by Baupost Group (as of December 31): 29.25 Million

 – Value of Holding (as of December 31): $751.11 Million

A new stake in EMC Corporation (NYSE:EMC) during the fourth quarter turned out to be a success for Baupost, as shares of the company rose by about 4.5% in the first quarter. In October, news of EMC’s merger with Dell surprised the markets, as it will rank as the largest such deal ever conceived in the technology sector. The merger is expected to be completed in the second half of this year. It was recently reported by Bloomberg that the storage equipment giant is looking to sell its Documentum unit to lighten the load for Dell. Raymond James downgraded EMC to ‘Outperform’ from ‘Strong Buy’, as the shares approached the firm’s $29 price target and as the shareholder vote at EMC this spring nears. Paul Singer‘s Elliott Management held about 42.23 million shares of EMC Corporation (NYSE:EMC) on December 31.

#1 Cheniere Energy, Inc. (NYSEMKT:LNG)

 – Shares Owned by Baupost Group (as of December 31): 26.09 Million

 – Value of Holding (as of December 31): $971.84 Million

Baupost boosted its Cheniere Energy, Inc. (NYSEMKT:LNG) holding by 15% during the fourth quarter, which turned out to be unwise, as the stock was one of the worst performers for the firm in the first quarter, losing about 9.3%. After years of construction, the company finally made its first delivery of natural gas to Brazil. According to Goldman Sachs, the company will generate $4.45 in free cash flow per share upon the completion of its Sabine Pass facility, but until that is done, it remains to be seen how safely and efficiently Cheniere will run the terminal. It is perhaps that uncertainty that is keeping investors away from the company. Andreas Halvorsen’s Viking Global upped its stake in Cheniere Energy, Inc. (NYSEMKT:LNG) by 22% in the fourth quarter, to 15.92 million shares.

Disclosure: None