In this article, we’ll explore Seth Klarman Stock Portfolio: Top 10 Stock Picks.
Seth Klarman, the founder and CEO of Baupost Group, is a prominent figure in the investment industry, with his hedge fund ranking as the 12th largest globally. Renowned for his insightful investment strategies, Klarman is also the author of Margin of Safety, a highly respected book that outlines his philosophy on value investing and is known for its scarcity and high resale value, often fetching prices over $1,500.
After earning his MBA from Harvard Business School, Klarman was recruited by his professor, Bill Poorvu, to help manage investments, marking the beginning of a successful career in finance. His approach emphasizes thorough analysis and a disciplined perspective, setting him apart in a competitive market. Poorvu, along with his partners, Howard Stevenson, Jordan Baruch, and Isaac Auerbach, formed the company name Baupost from their last names. This decision did not reflect a desire to exclude Klarman but rather preserved the initial branding of the firm. When Baupost launched in 1982, it had an impressive initial capital of $27 million, a substantial sum at the time.
The founders initially intended to distribute this capital among multiple money managers; however, they struggled to find other conservative managers who fit their investment style, leading to Klarman being entrusted with the entire amount. His approach to investing was distinctly conservative, which later became a hallmark of his strategy. Klarman is also the author of the influential book Margin of Safety, which provides insights into his investment principles and has become highly sought after by investors, with copies sometimes selling for over $1,500.
Navigating the Everything Bubble: Seth Klarman on Investment Risks and Opportunities in a Disrupted Market
Seth Klarman observes that the current investment landscape resembles an “everything bubble,” characterized by an influx of money across various asset classes. This phenomenon has been fueled by historically low interest rates, some even hitting zero. Alongside this, technological advancements have accelerated, leading to disruptions in numerous industries, which presents both challenges and opportunities for investors. He appeared on CNBC in June 2023 where he said:
“The first thing is, I think we’ve been in an everything bubble. A lot of money has flowed into virtually everything. Historic low interest rates, even zero rates, have precipitated that bubble. You’ve also had a lot of changes in the business world; technology has accelerated if anything, and you’ve seen disruption in all kinds of businesses, which creates challenges and opportunities for investors.”
Klarman noted that certain asset classes, particularly private credit, have gained significant attention during this period. He highlights that speculation has surged in various areas, from cryptocurrencies to meme stocks and SPACs, emphasizing the need for investors to be mindful of the risks associated with speculation and to understand the context of the current environment.
“Some asset classes have become increasingly popular; private credit has had its day in the sun. You’ve had speculation during that bubble in all kinds of things, from crypto to meme stocks to SPACs, in a way that has some important reminders for people about the dangers of speculation and the importance of remembering what kind of environment you’re in.”
Understanding Value Investing: The Need for a Dynamic Approach in an Ever-Changing Market Landscape
Seth Klarman believes that the traditional academic definition of value investing, which focuses on buying the cheapest stocks based on numerical analysis, is too simplistic. Instead, he views the market through a broader lens. He suggests that all stocks can have value, but they can also be overvalued. To navigate this complexity, investors need a clear framework or set of guidelines to assess the value of various assets and businesses, helping them identify which ones are mis-priced. Here are some comments from his CNBC interview from back in Q2 2023:
“The academic definition of value is to buy the stock that’s cheapest by the numbers… The way I think about the market is not that there are growth stocks and value stocks, but rather that all stocks may hold value but that all stocks also could potentially be overvalued. You have to have a mechanism, a rubric, for figuring out the value of different kinds of assets, different kinds of businesses to identify which ones are trading particularly mispriced.”
In today’s rapidly changing market, Klarman emphasizes the importance of looking beyond current earnings. He warns that today’s earnings may not be sustainable; a business could face disruption or even become obsolete, but conversely, its value could increase significantly. Therefore, a forward-thinking approach is crucial for investors, allowing them to adapt to evolving market conditions while identifying long-term opportunities.
“In a world that’s changing as fast as this one, it’s really important to think about not just what are the earnings today. The earnings may not be here tomorrow. the business might be disrupted. the business may be gone, or they could be 50% to 100% more.”
Seth Klarman of Baupost Group
Our Methodology
This article examines the top 10 stock holdings of Baupost Group for the second quarter of 2024, detailing the fund’s investments and the number of other hedge funds involved with these companies during the same period. The stocks are organized in ascending order based on the stake Baupost Group held in each, as of June 30, 2024.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Seth Klarman Stock Portfolio: Top 10 Stock Picks
10. WESCO International Inc. (NYSE:WCC)
Total Number of Shares Owned: 803,000
Total Value of Shares Owned: $127,292,000
Number of Hedge Fund Investors: 51
WESCO International, Inc. (NYSE:WCC) is well-positioned for growth, driven by its strong market presence as a leading distributor of electrical, industrial, and communications products. WESCO International, Inc. (NYSE:WCC)’s extensive supply chain and solid relationships with manufacturers enable it to capitalize on the increasing demand resulting from recent government infrastructure initiatives. With significant funding for public works, WESCO International, Inc. (NYSE:WCC) stands to benefit greatly, particularly in the electrical and telecommunications sectors.
Additionally, WESCO International, Inc. (NYSE:WCC)’s history of strategic acquisitions enhances its product offerings and market reach, allowing the company to capture a larger share of the market. Its focus on diversifying products, including automation and energy-efficient solutions, helps mitigate risks associated with economic downturns in specific industries. Furthermore, as sustainability becomes increasingly important, WESCO International, Inc. (NYSE:WCC)’s involvement in renewable energy projects aligns perfectly with market trends, attracting environmentally conscious customers and investors.
ClearBridge All Cap Value Strategy stated the following regarding WESCO International, Inc. (NYSE:WCC) in its Q2 2024 investor letter:
“Opportunities to improve the return profile of the portfolio, increase resiliency and diversify our risk exposure abound, and we are finding evidence of great values among mid cap names. These companies, with 10%+ FCF yields, durable growth prospects and sound competitive positions, are trading at truly distressed valuations, much to our benefit.
For example, new addition WESCO International, Inc. (NYSE:WCC), an electrical and broadband distributor, should enjoy mid-single-digit end market growth, likely modest growth above that of the market given its leading scale, and a wave of FCF once the supply chain for things like transformers loosens. Despite a depressed valuation, the company is levered to many of the same themes such as electrification and data center buildouts as stocks with much higher multiples. We believe it is merely a matter of when, and not if, it catches up.”
9. Jazz Pharmaceuticals Plc (NASDAQ:JAZZ)
Total Number of Shares Owned: 1,274,248
Total Value of Shares Owned: $136,000,000
Number of Hedge Fund Investors: 44
Jazz Pharmaceuticals Plc (NASDAQ:JAZZ) is showing significant potential for long-term growth, underpinned by strong financial performance and a solid pipeline of new drugs. In Q2 2024, Jazz Pharmaceuticals Plc (NASDAQ:JAZZ) exceeded expectations with over $1 billion in revenue, marking a 7% year-over-year increase. Key products like Xywav, used for sleep disorders, and Epidiolex, a treatment for epilepsy, posted impressive sales increases of 13% and 22%, respectively. These products continue to drive growth, particularly with Epidiolex expanding into new international markets. Oncology products like Rylaze and Zepzelca also contributed to the positive momentum, with Zepzelca’s sales rising by 15%.
In addition to its robust product sales, Jazz Pharmaceuticals Plc (NASDAQ:JAZZ) is progressing with exciting new developments in its drug pipeline. Notably, Zanidatamab, a promising cancer drug, is on track for potential FDA approval by November 2024, which could further boost revenue. Jazz Pharmaceuticals Plc (NASDAQ:JAZZ)’s broader oncology pipeline and its commitment to advancing treatments for both neurological and cancer-related conditions position it well for future growth.
From a financial standpoint, Jazz Pharmaceuticals Plc (NASDAQ:JAZZ) continues to demonstrate strong management, having recently initiated a $500 million share repurchase program and saved on interest expenses through loan restructuring. This financial prudence has allowed Jazz Pharmaceuticals Plc (NASDAQ:JAZZ) to revise its full-year revenue guidance upward, now projecting as much as $4.1 billion in total revenues for 2024.