Value investing is back in the limelight as investors prepare for a higher-for-long interest rate environment. Legendary value investor Seth Klarman had said in his 2000 letter to investors that while value investing might underperform the broader market amid changing investment sentiment, value investing as a basic investment principle and strategy would never go out of style.
“We are not seeking to keep up with any particular market index or benchmark. Rather, we are attempting to achieve good risk-adjusted investment results over time through the successful implementation of our investment philosophy. We continue to believe strongly in a value investment approach, attempting to buy assets or businesses at a considerable discount to underlying value. Bargains exist because the financial markets are inefficient, yet many investors lack the requisite patience and discipline to take advantage of them. A value approach may outperform or underperform the overall market at various times because of changing investor sentiment, but we believe that a value philosophy never goes out of style. When sentiment towards undervalued sectors of the market is at its nadir, it is the best time to be buying value.”
Seth Klarman is Investing in AI, Growth Stocks in 2024
A cursory glance at Seth Klarman’s Q1’2024 portfolio shows that the value investor is no longer limiting himself to defensive stocks with attractive valuation metrics. He’s investing in some high-growth, loss-making companies as well which are expected to grow in the future. Klarman has time and again said that value investing does not mean adhering to a set pattern without any flexibility.
What Makes a Stock Undervalued According to Klarman?
In his 2000 letter he said that he’d consider a stock undervalued if its undervaluation is “substantial” and there are enough catalysts to help it reach its true value in the future. Klarman also said the underlying business of the company he’d like to investing should be “growing, not eroding.”
Seth Klarman wrote “Margin of Safety” back in 1991. The book, just like Klarman’s investments, aged well, and after years of gaining no attention from the Wall Street, became a value investing bible and cult classic in the investing landscape. Talking about his book and investing philosophy on Capital Allocators with Ted Seides last year, Klarman said any piece of financial writing or advice should stand the test of time. He gave the example of Security Analysis written by Benjamin Graham and David Dodd, saying the companies and case studies mentioned in the book are no more, but the principles and strategies continue to stay relevant. Klarman thinks even if humans are replaced by computers, these timeless investing principles will stay valid.
Klarman also said chances of making money by investing in “widely-followed” stocks are not that high.
“Looking at what everybody else is looking at is probably not that interesting. If you are doing to look at what everybody else looks at, look at it in a highly differentiated way. But you are not going to make money by outsmarting people on widely followed stocks with an undifferentiated opinion.”
Baupost Group Returns
The media-shy billionaire, worth about $1.3 billion, founded Baupost Group in 1982. While the fund doesn’t publicly share its returns, a Wall Street Journal report last year disclosed that Baupost has returned on average about 20% annually since its inception.
For this article we scanned Klarman’s Q1’2024 portfolio and chose three exciting stocks he bought new stakes in during the first quarter. Unlike NVIDIA Corp (NASDAQ:NVDA), Amazon.com Inc (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG), which everyone is buying, you will see some new names in the portfolio.
To see more new stocks in Klarman’s portfolio, click Top 4 New Stock Picks of Seth Klarman in 2024.
SoundHound AI, Inc. (NASDAQ:SOUN)
Seth Klarman’s Stake Value: $5,554,000
Value investor Seth Klarman piling into a high-growth AI stock that has run more than 163% so far this year is news in its own. SoundHound AI, Inc. (NASDAQ:SOUN) is a California-based AI voice and speech recognition solutions company that came to the limelight following the AI revolution after the launch of ChatGPT. Seth Klarman’s Baupost reported owning a $5,554,000 stake in SoundHound AI, Inc. (NASDAQ:SOUN) during the first quarter of 2024. In addition to NVIDIA Corp (NASDAQ:NVDA), Amazon.com Inc (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG), AI-focused investors are also buying SOUN.
Fortrea Holdings Inc. (NASDAQ:FTRE)
Seth Klarman’s Stake Value: $12,194,000
Healthcare solutions company Fortrea Holdings Inc. (NASDAQ:FTRE) is one of the stocks Seth Klarman is buying in 2024. His hedge fund Baupost opened a $12,194,000 stake in Fortrea Holdings Inc. (NASDAQ:FTRE) during the March quarter this year.
Of the 933 hedge funds tracked by Insider Monkey as of the end of 2023, 31 hedge funds reported owning stakes in Fortrea Holdings Inc. (NASDAQ:FTRE).
In May Fortrea Holdings Inc. (NASDAQ:FTRE) posted Q1 results. Adjusted EPS in the period came in at -$0.04, missing estimates by $0.04. Revenue fell 4.6% year over year to $662.1 million, missing estimates by $92.48 million.
Unlike NVIDIA Corp (NASDAQ:NVDA), Amazon.com Inc (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG), FTRE is a small company with low hedge fund sentiment.
Vltava Fund mentioned Fortrea Holdings Inc. (NASDAQ:FTRE) in its Q4 2023 investor letter. Here is what the firm has to say:
“Value can be created in various ways. Acquisition is one possibility. So-called spin-offs represent another. This involves hiving off a part of a company into a separate entity and taking it to market. One such spin-off occurred last summer with LabCorp. It spun off a smaller part of the company under the name Fortrea Holdings Inc. (NASDAQ:FTRE). For each of their shares, LabCorp shareholders received one share of the new Fortrea. It started trading at a fairly attractive price, so we sold immediately. Considering the price we got, we could say that this spin-off brought us some value, but it was only a one-off transaction and not a very large one at that.”
GDS Holdings Limited (NASDAQ:GDS)
Seth Klarman’s Stake Value: $17,290,000
China-based data center company GDS Holdings Limited (NASDAQ:GDS) is another growth stock Seth Klarman bought in the first three months of 2024. So far this year GDS Holdings Limited (NASDAQ:GDS) shares have gained about 8% in value.
These were just three new stock picks of Seth Klarman. But he’s buying many stocks this year.
Click to see 4 More Top New Stock Picks of Seth Klarman in 2024.
If you are looking for an AI stock that is as promising as Microsoft but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: Michael Burry Is Selling These Stocks and A New Dawn Is Coming to US Stocks.
Disclosure: None. Seth Klarman 2024 Portfolio: Top New Stock Picks was originally published on Insidermonkey.com
