Top Five Stock Picks of Billionaire Value Investor Seth Klarman

Boston-based Baupost Group LLC is one of the world’s largest hedge funds, with $28.5 billion in assets under management. Baupost was launched by several professors from Harvard Business School back in 1982, who hired Seth Klarman to manage a portion of their capital. Eventually, Klarman, who is among the best-known value investors in the finance world, took the reins of the business and built a multi-billion dollar hedge fund firm out of it. It is worth pointing out that Baupost Group has incurred losses in only two years since its inception, though it is currently on its way to registering its third such year. The hedge fund was down by 6.6% in the nine-month period that ended September 30. Baupost Group is widely-known for picking great winners after periods of turmoil, so it could be worthwhile to take a look at its largest equity holdings at the end of the third quarter. The hedge fund made nine new purchases and increased its position in ten holdings during the September quarter, while reducing its holdings in only five stocks, which stresses the point outlined above. So let’s take a look at the top five stock picks of Seth Klarman and his team at the end of the third quarter.

Hedge funds have been underperforming the market for a very long time. However, this was mainly because of the huge fees that hedge funds charge as well as the poor performance of their short books. Hedge funds’ long positions performed actually better than the market. Small-cap stocks, activist targets, and spin offs were among the bright spots in hedge funds’ portfolios. For instance, the 15 most popular small-cap stocks among hedge funds outperformed the market by more than 53 percentage points since the end of August 2012, returning 102% (read the details here). This strategy also managed to beat the market by double digits annually in our back tests covering the 1999-2012 period.

#5 Antero Resources Corp (NYSE:AR)

Shares Owned by Baupost Group LLC (as of September 30): 16.10 Million

Value of Holding (as of September 30): $340.67 Million

Baupost Group nearly doubled its position in Antero Resources Corp (NYSE:AR) during the third quarter, ending the three-month period with 16.10 million shares. Baupost’s disappointing performance this year can mainly be attributed to its high exposure to the energy and biotech sectors, but the hedge fund keeps buying shares of the Colorado-based shale gas company. The independent oil and natural gas company has seen its stock plummet by 43% thus far in 2015. Just recently, Barclays cut its price target on the stock to $30 from $31 and reiterated its ‘Overweight’ rating, citing continued pressure from low gas prices. Antero’s strong hedge position and strong balance sheet allowed the company to deliver a solid financial performance during the third quarter. Jim Simons’ Renaissance Technologies holds a stake of 276,804 shares in Antero Resources Corp (NYSE:AR) as of September 30.

#4 Pioneer Natural Resources (NYSE:PXD)

Shares Owned by Baupost Group LLC (as of September 30): 4.14 Million

Value of Holding (as of September 30): $503.23 Million

Pioneer Natural Resources (NYSE:PXD) is another oil and gas exploration company held by Baupost Group. The Boston-based hedge fund upped its position in the company by 72,000 shares during the third quarter. According to a recent article published by Reuters, Pioneer’s CEO Scott Sheffield recently asserted that Pioneer would not add new oil rigs this year as previously anticipated. Pioneer Natural Resources had previously planned to add two rigs each month during 2015, but has added only eight rigs thus far. The company intends to turn its focus to its operations in the Permian Basin, which the CEO considers to be “the only place to grow oil long-term in this country”. Meanwhile, the stock is 4% in the red year-to-date, but has been riding a steady uptrend since the end of August. Kevin D. Eng’s Columbus Hill Capital Management reported owning 435,413 shares of Pioneer Natural Resources (NYSE:PXD) via its 13F filing for the third quarter.

Klarman’s top three stock picks have the light shone on them on the next page.

#3 Alcoa Inc. (NYSE:AA)

Shares Owned by Baupost Group LLC (as of September 30): 52.27 Million

Value of Holding (as of September 30): $504.93 Million

Baupost Group added a 52.27 million-share position in Alcoa Inc. (NYSE:AA) to its portfolio during the third quarter, which accounts for 8.41% of that portfolio’s value as of September 30. At the end of September, Alcoa announced its plans to separate into two independent, publicly-traded companies: one of them is set to focus on upstream aluminum production and midstream products, while the other will be focused on downstream specialist metals and products. The aforementioned separation is intended to qualify as a tax-free transaction for U.S. federal income tax purposes, but it may also create two businesses that will lure different types of investors. Meanwhile, the shares of Alcoa have lost 49% since the beginning of the year and are currently trading at a trailing price-to-earnings ratio of 20.49, which is slightly below the 22.70 ratio of the S&P 500. Joe Huber’s Huber Capital Management owns 4.36 million shares of Alcoa Inc. (NYSE:AA) as of the end of the third quarter.

#2 ViaSat Inc. (NASDAQ:VSAT)

Shares Owned by Baupost Group LLC (as of September 30): 11.53 Million

Value of Holding (as of September 30): $741.47 Million

Seth Klarman’s Baupost Group held its position in ViaSat Inc. (NASDAQ:VSAT) unchanged during the third quarter at 11.53 million shares. The broadband services and technology company has seen its shares drop by nearly 4% since the beginning of the year, partially owing to its disappointing results for the fiscal second quarter that ended September 30. The company reported revenues of $353.3 million, which were down by 1.5% year-over-year. Meanwhile, its non-GAAP diluted per share net income came in at $0.30, compared to $0.68 reported in the same period last year. Just recently, ViaSat sealed a partnership with Virgin America, which enables travelers to benefit from a o21quicker Wi-Fi connection on Virgin’s airbus aircraft, and will also bring Netflix to air travelers. Mason Hawkins’ Southeastern Asset Management added 1.17 million shares to its position in ViaSat Inc. (NASDAQ:VSAT) during the September quarter, ending the three-month period with 4.65 million shares.

#1 Cheniere Energy Inc. (NYSEMKT:LNG)

Shares Owned by Baupost Group LLC (as of September 30): 22.67 Million

Value of Holding (as of September 30): $1.09 Billion

Cheniere Energy Inc. (NYSEMKT:LNG) was by far the largest equity holding of Baupost Group at the end of the third quarter, representing 18.24% of its portfolio. Seth Klarman’s hedge fund lifted its stake in the energy company by 7.30 million shares during the bloody quarter. The U.S liquefied natural gas exporter has seen its stock decline by 32% since the start of 2015. The low oil-price environment and fast-growing supply of LNG is anticipated to put downward pressure on the nation’s gas exports, which might hinder Cheniere’s operations. Meanwhile, Cheniere’s Sabine Pass LNG export plant in Louisiana is expected to receive its first tanker for loading at the beginning of 2016. Andreas Halvorsen’s Viking Global cut its position in Cheniere Energy Inc. (NYSEMKT:LNG) by 4.12 million shares during the third quarter and held an 11.32 million-share stake as of September 30.

Disclosure: None