Seth Klarman’s Latest Stock Picks Include AIG

Copies of Seth Klarman’s book Margin of Safety, published in 1991, have changed hands for up to $1,500 as some market watchers consider the value investor a guru. Klarman manages the Baupost Group, which recently filed its 13F for the fourth quarter of 2012. While the fund’s holdings as of the end of December may be out of date, we think that they’re at least worth considering; we have found that analyzing 13F filings can yield profitable investment strategies, with one example being the fact that the most popular small cap stocks among hedge funds tend to beat the market by 18 percentage points per year (see more details of hedge fund related investing strategies). Of course, if Klarman’s thoughts on investing from 20 years ago are so valuable it’s at least worth a free look at what he thought about the market only a couple months ago. Read on for three things we noticed in the new 13F and check out a history of Baupost’s filings.

The AIG bandwagon. In the third quarter, American International Group, Inc. (NYSE:AIG) had vaulted onto our list of the most popular stocks among hedge funds (see the full top ten list) as a number of hedge funds initiated positions in the stock. Baupost had not reported any ownership of the insurer at the end of September, but the new 13F discloses a position of 7 million shares. There’s certainly a case to be made that AIG is a “margin of safety” stock at a discount of over 40% to the book value of its equity. While we’re skeptical of the quality of AIG’s assets and do not think that it should be trading at book value, we think a smaller discount may be more appropriate. The current-year P/E is also reasonable at 11.

Dumping tech. Baupost completely sold out of Hewlett-Packard Company (NYSE:HPQ), which had been one of its largest holdings three months earlier, and cut its stake in Oracle Corporation (NASDAQ:ORCL) to about 10 million shares from about 14 million. HP has merely proven to be a value trap: it is down 41% in the last year. Revenue fell in its most recent quarter compared to the same period in the previous fiscal year and the market is still much more bearish than the sell-side as analyst estimates actually imply a forward earnings multiple of only 5. The dividend yield at HP is just over 3% for now. Oracle, of course, is more of a software and services company and so it has been on the upswing recently: the stock outperformed the S&P 500 over the last year and net income was up 18% in the fiscal quarter ending in November 2012 versus a year earlier.

Find out which gold stock Baupost was selling, and which it was keeping:

Oracle trades at 16 times trailing earnings and so given the combination of value and recent growth it may be worth considering. HP, meanwhile, looks appealing in terms of value metrics but we wouldn’t have the courage to buy- and Klarman backing out doesn’t make us think more positively of the company. Ralph Whitworth’s Relational Investors had been another major HP shareholder in the third quarter (find Relational’s favorite stocks).

Selling Allied Nevada. Klarman sold a little over 2 million shares of Allied Nevada Gold Corp. (NYSE:ANV), which still left the fund with a large position but may signal lower confidence. The $2.1 billion market cap gold miner saw its earnings fall in its most recent quarterly report from their levels a year before, though revenue has been up (likely on rising production). The current-year P/E is 16. We don’t think that Klarman and his team were generally bearish on gold because they actually slightly increased their stake in NovaGold Resources Inc. (NYSE:NG).

We agree with Baupost that AIG has value potential, and think that investors should consider the stock. Allied Nevada is too dependent on gold prices, and therefore speculative, for our taste and we have mentioned that we can’t bring ourselves to buy HP either despite what looks to be a very cheap earnings multiple.

Disclosure: I own no shares of any stocks mentioned in this article.