Seth Klarman’s Baupost Group LLC ranks as one of the world’s largest hedge funds and has an equity portfolio valued at $5.95 billion according to the fund’s recently submitted 13F filing with the SEC for the reporting period of March 31. The Boston, Massachusetts-based fund was founded in 1982 by Klarman, who continues to run it to this day. Baupost Group focuses on value investments and invests in a number of market segments, including technology, basic materials, services, healthcare, and others. In this article we’ll take a look at three of its top mid-cap picks, Cheniere Energy, Inc. (NYSEMKT:LNG), Antero Resources Corp (NYSE:AR), and Pioneer Natural Resources (NYSE:PXD), all of which are in the fund’s top six overall positions.
First a quick word on why we track hedge fund activity. In 2014, equity hedge funds returned just 1.4%. In 2013, that figure was 11.3%, and in 2012, they returned just 4.8%. These are embarrassingly low figures compared to the S&P 500 ETF (SPY)’s 13.5% gain in 2014, 32.3% gain in 2013, and 16% gain in 2012. Does this mean that hedge fund managers are dumber than a bucket of rocks when it comes to picking stocks? The answer is definitely no. Our small-cap hedge fund strategy, which identifies the best small-cap stock picks of the best hedge fund managers returned 28.2% in 2014, 53.2% in 2013, and 33.3% in 2012, outperforming the market each year (it’s outperforming it so far in 2015 too). What’s the reason for this discrepancy you may ask? The reason is simple: size. Hedge funds have gotten so large, they have to allocate the majority of their money into large-cap liquid stocks that are more efficiently priced. They are like mutual funds now. Consider Ray Dalio’s Bridgewater Associates, the largest in the industry with about $165 billion in AUM. It can’t allocate too much money into a small-cap stock as merely obtaining 2% exposure would really move the price. In fact, Dalio can’t even obtain 2% exposure to many small-cap stocks, even if he essentially owned the entire company, as they’re simply too small (or rather, his fund is too big). This is where we come in. Our research has shown that it is actually hedge funds’ small-cap picks that are their best performing ones and we have consistently identified the best picks of the best managers, returning 139% since the launch of our small-cap strategy compared to less than 60% for the S&P 500 (see the details).
Cheniere Energy, Inc. (NYSEMKT:LNG) remains Klarman’s top pick, with the fund owning 13.81 million shares valued at $1.07 billion. The position in the Houston, Texas-based energy company was unchanged during the first quarter. Cheniere Energy has an expansion strategy aimed at constructing nine liquefaction trains to be completed under two project, which is expected to deliver 40.5 metric tons per annum in total production capacity. The company’s Board of Directors already made a Final Investment Decision (FDI) for the commencement of the construction of two of the earmarked liquefaction trains. The company’s expansion efforts are likely making it attractive to investors regardless of current financial performance, which explains the company’s shares appreciating by 7% year-to-date despite reporting a net loss of $267.71 million or $1.18 per share, for the first quarter of 2015. That’s a bigger loss compared to the same quarter last year when the company registered a net loss of $97.81 million, or $0.44 per share. The revenues for the period saw a slight increase however, to $68.37 million compared to $67.55 million year-over-year. Andreas Halvorsen‘s Viking Global overtook Baupost Group as the top shareholder of Cheniere Energy, Inc. (NYSEMKT:LNG) in our database after increasing its position in the company by 56% during the first quarter.
Pioneer Natural Resources (NYSE:PXD) represents a new position for Klarman, with it consisting of 3.17 million shares with a market value of $517.83 million as of the reporting period. Pioneer Natural Resources is an independent oil and gas company headquartered in Irving, Texas which recently overtook Ameriprise Financial Inc (NYSE:AMP) to claim the 207th position among the largest companies in the S&P 500 index with its market cap of $23.31 billion. The company registered an adjusted net loss of $5 million for the first quarter of 2015, which represents a loss of $0.03 per diluted share. Pioneer Natural Resources (NYSE:PXD) was also unceremoniously lampooned by billionaire investor David Einhorn in early May, with Einhorn calling the company a “mother fracker” with potential to for a “nearly infinite supply of negative return opportunities.” In addition to Klarman’s new position, Kyle Bass‘ Heyman Advisors also opened a new position in Pioneer Natural Resources during the first quarter.
Klarman added to his holding of Antero Resources Corp (NYSE:AR), increasing the position by 19% during the first quarter to 9.35 million shares of the company with a market value of $330.16 million. Antero Resources Corporation is an oil and natural gas company headquartered in Denver, Colorado. The company’s main activities are acquisition, exploration, and development of natural gas, oil properties and NGLs located in the U.S. The company registered higher production for the quarter compared to the fourth quarter of 2014, posting an increase of 17%. Its net daily liquids production stood at a record 40,000 barrels per day, representing a 32% increase quarter over quarter and a 145% hike year-over-year. The company had a diversified portfolio that enabled it to sell an estimated 64% of its natural gas production at optimal prices. Jacob Rothschild‘s RIT Capital Partners opened an extremely bullish new position on Antero Resources Corp (NYSE:AR) during the first quarter, one that gave it nearly 21% exposure to the stock in its equity portfolio.
Disclosure: None
