In this article, we discuss the 10 best picks of Seth Klarman and the performance of his value stock portfolio in 2021. If you want to skip our detailed analysis of these stocks, go directly to Seth Klarman’s Value Stock Portfolio Performance in 2021: 5 Best Picks.
Value investors are rising in prominence on Wall Street as growth stocks undergo a period of prolonged turmoil amid rising inflation and tightening monetary policies. Seth Klarman, the billionaire chief of Baupost Group, is one such investor. Klarman is often called the “Oracle of Boston” by market experts, a reference to legendary value investor Warren Buffett who is dubbed the “Oracle of Omaha”, due to his value-oriented investing strategy and the success it has brought him over the years. Since it was founded in 1983, Baupost Group has delivered an average annual return of more than 20% to investors.
Klarman Sounds Alarm Bells On Market Crash
Klarman recently sounded the alarm bells on a looming market crash, telling clients of Baupost in an annual letter that the markets were characterized by “stretched valuations and deep complacency”. According to Business Insider, which obtained a copy of the letter, the famous value investor predicted mounting inflation and higher interest rates were posing a threat to financial markets in which many participants held “speculative holdings” akin to “roach motels”. Klarman also underlined that his fund had purchased hedges to protect itself against some of these looming risks.
The chief of Baupost Group called market volatility “a value investor’s best friend”, highlighting that it created opportunity for shrewd investors. He identified commercial real estate as one of these opportunities. Baupost Group, per Klarman, had only lost money four times since it was founded, noting that he strived to create value for his clients for the long-term rather than focus on “high fliers” of the present. Some of the top stocks in the portfolio of Baupost Group in 2021 included Alphabet Inc. (NASDAQ:GOOG), International Flavors & Fragrances Inc. (NYSE:IFF), and Nexstar Media Group, Inc. (NASDAQ:NXST), among others discussed in detail below.
Our Methodology
The companies listed below were picked from the investment portfolio of Baupost Group at the end of the third quarter of 2021. The stocks that have featured in the portfolio consistently for the first, second, and third quarter of 2021 were selected and sorted based on the gains in their share price over 2021.
Data from around 900 elite hedge funds tracked by Insider Monkey was used to identify the number of hedge funds that hold stakes in each firm.
Seth Klarman’s Value Stock Portfolio Performance in 2021: Best Picks
10. Willis Towers Watson Public Limited Company (NASDAQ:WTW)
Number of Hedge Fund Holders: 75
Gain in Share Price in 2021: 16%
Willis Towers Watson Public Limited Company (NASDAQ:WTW) operates as an insurance broker. It has been among the favorite stocks of hedge funds for years. At the end of the third quarter of 2021, 75 hedge funds in the database of Insider Monkey held stakes worth $5 billion in Willis Towers Watson Public Limited Company (NASDAQ:WTW), up from 70 in the preceding quarter worth $5.5 billion.
Baupost Group first purchased a stake in Willis Towers Watson Public Limited Company (NASDAQ:WTW) during the first quarter of 2021, buying 2.5 million shares at an average price of $217.92 per share. In the next two quarters, the fund proceeded to slash that position by 24% and 47% respectively. At the end of September, the fund owned 1 million shares in Willis Towers Watson Public Limited Company (NASDAQ:WTW) worth $232 million, representing 2.13% of the portfolio.
Just like Alphabet Inc. (NASDAQ:GOOG), International Flavors & Fragrances Inc. (NYSE:IFF), and Nexstar Media Group, Inc. (NASDAQ:NXST), Willis Towers Watson Public Limited Company (NASDAQ:WTW) is one of the stocks attracting the attention of elite hedge funds.
In its Q4 2020 investor letter, Vltava Fund, an asset management firm, highlighted a few stocks and Willis Towers Watson Public Limited Company (NASDAQ:WTW) was one of them. Here is what the fund said:
“There were two new additions to the portfolio last year – (including) shares of the insurance broker Willis Towers Watson. I mentioned both purchases already in the previous newsletter to shareholders. At first sight, these were only minor changes. There were many more transactions in the portfolio over the past year, however. Most purchases were directed to shares we have already held in the portfolio. We have been purchasing virtually all the stocks we hold, many of them repeatedly. While we are by no means opposed to anything new and always are looking for new investment opportunities, we generally tend to gravitate to what we already have in the portfolio, to what we know well, and moreover what we see is working out well.”
9. Micron Technology (NASDAQ:MU)
Number of Hedge Fund Holders: 63
Gain in Share Price in 2021: 25%
Micron Technology (NASDAQ:MU) markets memory and storage products. Klarman invested in the company for the first time in the second quarter of 2013, buying around 41 million shares at an average price of $11 per share. By late 2015, the fund had sold off this stake completely. In the third quarter of 2020, Baupost Group opened a new position in Micron Technology (NASDAQ:MU), a stake that has since grown to 7.1 million shares worth $508 million, representing 4.67% of the portfolio of the fund.
Micron Technology (NASDAQ:MU) has benefited from the rise in chip prices in 2021 as increased demand and supply issues provide a double boost to the industry. Hedge funds have been piling into the stock as well. At the end of the third quarter of 2021, 63 hedge funds in the database of Insider Monkey held stakes worth $3.8 billion in Micron Technology (NASDAQ:MU).
In its Q1 2021 investor letter, Bonsai Partners, an asset management firm, highlighted a few stocks and Micron Technology (NASDAQ:MU) was one of them. Here is what the fund said:
“Micron Technology (NASDAQ:MU) is a manufacturer of memory semiconductor chips. Micron appreciated 17.3% during the quarter.
With the semiconductor cycle in full swing, sentiment continued to improve for major DRAM and NAND suppliers. Spot pricing for DRAM continues its upward march due to supply shocks across the industry and sustained demand levels that continue to outstrip supply.
As a result, Micron showed improving results for the fiscal first quarter, raised guidance intra-quarter for the fiscal second quarter, and offered strong guidance for the fiscal third quarter in both growth and margins.
While the cyclical nature of DRAM hasn’t changed, the cycles themselves continue to become more benign, leading to long-term economic improvement across these businesses. Micron Technology (NASDAQ:MU) is now continuously profitable, with industry players in a dramatically stronger position than even just five years ago.
The biggest negative surprise in the quarter came from Micron Technology (NASDAQ:MU)’s exit from its 3D XPoint hybrid memory business. The company also announced its decision to sell its accompanying Utah fab. Fortunately, this development does not alter the investment thesis much since 3D XPoint was an option ticket for future growth. While it’s unfortunate this product didn’t pan out, now is an excellent time to sell a fab, so perhaps it is a blessing in disguise?”
8. Meta Platforms, Inc. (NASDAQ:FB)
Number of Hedge Fund Holders: 248
Gain in Share Price in 2021: 25%
Meta Platforms, Inc. (NASDAQ:FB) is a diversified technology company. Even though it changed the brand name from Facebook to Meta in 2021 to highlight a shift in priorities, hedge funds are still confident about the long-term prospects of the stock as an advertising play. At the end of the third quarter of 2021, 248 hedge funds in the database of Insider Monkey held stakes worth $38 billion in Meta Platforms, Inc. (NASDAQ:FB).
Meta Platforms, Inc. (NASDAQ:FB) is also a constant presence in the portfolio of Baupost Group. At the end of September 2021, the fund owned 1.5 million shares in Meta Platforms, Inc. (NASDAQ:FB) worth $525 million, representing 4.82% of the portfolio. The company has featured in the Klarman portfolio since the first quarter of 2021.
In its Q1 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Meta Platforms, Inc. (NASDAQ:FB) was one of them. Here is what the fund said:
“We continued to keep our learnings from 2020 in mind during the quarter as we sought to increase the up capture of the portfolio. We also made adjustments to the portfolio’s top 10 holdings to increase the participation of select stocks, including Meta Platforms, Inc. (NASDAQ:FB) , while trimming our weighting to stable names, which now represent 47% of the portfolio. Our repositioning has been encouraging so far with the portfolio performing better on up days in the market while maintaining good down capture during more turbulent sessions.”
7. eBay Inc. (NASDAQ:EBAY)
Number of Hedge Fund Holders: 49
Gain in Share Price in 2021: 29%
eBay Inc. (NASDAQ:EBAY) owns and runs an internet platform for buyers and sellers. Klarman has been a long-term admirer of the stock, first buying a stake in eBay Inc. (NASDAQ:EBAY) during the second quarter of 2014. The position, worth around 10 million shares, was sold off entirely by late 2015. After a gap of three years, Klarman once again bought a stake in eBay Inc. (NASDAQ:EBAY) during the fourth quarter of 2018. Since then, he has added to that stake which, as of September 2021, consisted of 5.9 million shares worth more than $416 million, representing 3.82% of the total portfolio.
Alongside Baupost, other elite hedge funds are also bullish eBay Inc. (NASDAQ:EBAY) as a new fiscal year begins. Among the hedge funds being tracked by Insider Monkey, United Kingdom-based investment firm Ako Capital is a leading shareholder in eBay Inc. (NASDAQ:EBAY) with 7.3 million shares worth more than $512 million.
In its Q4 2020 investor letter, Steel City Capital, an asset management firm, highlighted a few stocks and eBay Inc. (NASDAQ:EBAY) was one of them. Here is what the fund said:
“eBay (Long): eBay Inc. (NASDAQ:EBAY) continues to be a core holding in the Partnership’s long book despite not having any “sexy” attributes or unknown catalysts. I like EBAY because it checks the boxes of being both capital light and priced as a value stock (low multiple of free cash flow), factors which are attractive in a potentially inflationary environment.
In 3Q’20 the company printed $2.6 billion of revenue vs. guidance of $2.4 billion (a $200 million beat) while full year revenue guidance was taken up by $400 million, implying 4Q’20 would be higher by $200 million as well. Free cash flow from continuing ops was guided to $2.3 billion for the full year, slightly above the $2.0 billion the business regularly generated before getting a Covid/stimulus related boost.
eBay Inc. (NASDAQ:EBAY) will have about $4.6 billion of cash on hand at year end5 and should receive another $2.0 billion in after-tax proceeds this quarter related to the sale of its Classifieds portfolio6 . Additionally, the company will receive 540 million shares from Adevinta which are currently valued at ~$8.3 billion, and also holds a warrant to purchase a 5.0% stake in payment processor Adyen which was last valued at ~$775 million. Additional asset sales are also not out of the question7 . Backing everything out at today’s market cap of $38.2 billion gives a clean market cap for the core marketplace of $22.6 billion. At a minimum, I expect $2.0 billion of free cash flow in FY’21, with the potential for a higher figure to the extent the incoming administration is successful in cutting additional stimulus checks. By FY’22, free cash flow should ramp to $2.3 billion after incorporating a full year’s contribution from the managed payments initiative. This values EBAY at 9.6x free cash flow, or 11.7x excluding stock-based comp.”
6. Viasat, Inc. (NASDAQ:VSAT)
Number of Hedge Fund Holders: 18
Gain in Share Price in 2021: 39%
Viasat, Inc. (NASDAQ:VSAT) is a communications firm based in California. Several major hedge funds have turned bullish towards the company recently. At the end of the third quarter of 2021, 18 hedge funds in the database of Insider Monkey held stakes worth $1.3 billion in Viasat, Inc. (NASDAQ:VSAT).
At the end of September, Baupost Group owned 16 million shares in Viasat, Inc. (NASDAQ:VSAT) worth $897 million, representing 8.24% of the portfolio. Viasat, Inc. (NASDAQ:VSAT) is the third largest holding in the Klarman portfolio and one of the oldest. Klarman first opened a position in Viasat, Inc. (NASDAQ:VSAT) in the fourth quarter of 2010. Since then, the company has consistently featured in Baupost portfolio. Baupost last registered new activity around the stock more than a year ago.
In addition to Alphabet Inc. (NASDAQ:GOOG), International Flavors & Fragrances Inc. (NYSE:IFF), and Nexstar Media Group, Inc. (NASDAQ:NXST), Viasat, Inc. (NASDAQ:VSAT) is one of the stocks on the radar of institutional investors.
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Disclosure. None. Seth Klarman’s Value Stock Portfolio Performance in 2021: 10 Best Picks is originally published on Insider Monkey.
