Seth Klarman, who manages the Baupost Group, is such a widely followed value investor that his book Margin of Safety, which was written in 1991 and details his thoughts on investing, has sold for $1,500. Baupost and hundreds of other hedge funds file 13Fs each quarter with the SEC, disclosing many of their long equity positions as of the beginning of the previous quarter. We track these filings and use them to develop investing strategies; we have found, for example, that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year. We also like to review filings from top managers such as Klarman and compare them to their older filings to see what they have been buying or selling. Here are some trends we noticed when comparing Baupost’s holdings as of the end of March to previous filings:
Hated companies. Because of their Gulf of Mexico disaster and government bailout, respectively, BP plc (ADR) (NYSE:BP) and American International Group Inc (NYSE:AIG) are characterized by pretty poor investor sentiment. Klarman and his team were buying both stocks during Q1, and they are now both among the fund’s three largest holdings by market value. There’s a value case to be made for either of these two companies: BP plc (ADR) (NYSE:BP) trades at 8 times forward earnings estimates (though this isn’t particularly out of the ordinary for an oil major in the current environment, as can be seen from looking at the company’s peers) while American International Group Inc (NYSE:AIG)’s price-to-book ratio is only 0.7 (meaning the stock is priced at a significant discount to book value). While AIG was the most popular stock among hedge funds during the fourth quarter of 2012 (find more of hedge funds’ favorite stocks), it is not widely owned by large institutional investors such as mutual funds. BP plc (ADR) (NYSE:BP) also merits attention for a dividend yield of 5% at current prices and dividend levels.
Selling Oracle. News Corp (NASDAQ:NWSA) wasn’t the only one of Klarman’s favorites from three months ago to get demoted during Q1, with Baupost cutting its stake in Oracle Corporation (NASDAQ:ORCL) by about two-thirds. The company’s most recent 10-Q showed flat performance versus a year earlier, but the stock carries a trailing earnings multiple of 16 (implying that at least some earnings growth is already priced into the stock). As a result Oracle Corporation (NASDAQ:ORCL) doesn’t look too exciting to us, and some of the company’s peers might be better values.
Rovi. Turning away from large caps, the fund increased its holdings of digital program guide and recommendations provider Rovi Corporation (NASDAQ:ROVI) to a total of 8.2 million shares. Wall Street analysts like the $2.4 billion market cap company, with consensus earnings forecasts implying a forward P/E of10 and a five-year PEG ratio of 0.9. However, revenue shrunk 10% in its most recent quarter compared to the same period in the previous year, while those projections assume an increase in earnings per share.
As a result, we’d have to see that Rovi Corporation (NASDAQ:ROVI) can sustain its current business and possibly provide some growth before considering it as a value stock. BP plc (ADR) (NYSE:BP) and American International Group Inc (NYSE:AIG) certainly look cheap, and we’d recommend that investors do further research on the companies, although in BP’s case in particular some industry peers may be better buys. As for Baupost’s big sales, they are certainly dependent on growing their earnings going forward but at least in the case of News Corp (NASDAQ:NWSA) we can see that recent performance has been good even without accounting for the potential benefits of the breakup.
Disclosure: I own no shares of any stocks mentioned in this article.
