Don't let it get away!
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LONDON -- Most investors who've heard of hedge fund manager Seth Klarman -- which isn't all that many, given his stellar track record -- know simply that second-hand copies of his book Margin of Safety, long out of print, change hands on eBay for thousands of dollars.
Read it, and it's instantly clear where Klarman, who turns 56 this year, draws his inspiration from. Indeed, the title -- Margin of Safety -- pretty much gives the game away. In short, Klarman, and Baupost Group, which he's run for 30 years, are Benjamin Graham-style value investors extraordinaire.
But despite running the ninth-largest hedge fund in the world -- and one of the five most successful in terms of investing returns -- Klarman keeps a low profile. Boston-based, he values his distance from Wall Street, steadily paddling his own contrarian canoe.
As with Warren Buffett, the only glimpses into his thinking come with his periodic quarterly 13F filings to America's Securities and Exchange Commission.
And earlier this week, Baupost posted its latest 13F, covering the three months to June 30. Not having updated myself on his holdings for a few months, I thought I'd take a look. Key questions:
- Which are his biggest current holdings?
- Has he been buying anything new?
Both questions have value -- literally. For when value has been outed, Klarman doesn't hang about, but sells and moves onto the next prospect. And if he doesn't see such a prospect, he stays liquid, with cash sometimes making up as much as 50% of his portfolio. Equally, if he's buying into a new position, that's a sure-fire indicator that this legendary value investor has sniffed a stock with potential upside.
Baupost's biggest holding is oil giant BP (LSE: BP.L ) , which makes up 14.2% of his portfolio, fractionally up from three months before.
Beaten down in the wake of 2010's Gulf of Mexico fallout, and the ongoing squabbles with its Russian partners, veteran value investor Klarman obviously sees in BP the potential upside he seeks.
Trading on a forecast price-to-earnings ratio of just seven, and offering a forecast dividend yield of 5.2%, BP self-evidently has "cheap" written all over it. Granted, Russia could yet go wrong, but Klarman is clearly betting that it won't -- confident that when investors realize this, the shares will rocket.
Virtually the same proportion of his portfolio -- 14.1%, again little changed from three months before -- is made up of another beaten-down stock: Hewlett-Packard (NYSE: HPQ ) , which has also attracted its share of unflattering headlines in recent times.
Making up one of a very few American manufacturers to which the epithet "iconic" can genuinely be attached, Hewlett-Packard has fallen on hard times.
Trading at a historic 12-month P/E ratio of 7.4 -- versus an industry average of 18.5 -- it's not difficult to see what Klarman sees. Indeed, on a five-year basis, Hewlett-Packard's P/E of 19.8 is virtually indistinguishable from the industry average of 20. And while waiting for the, there's a dividend yield that's almost twice the industry average of 1.5%.
What does it take for Klarman to make a share his third-biggest holding -- out of nowhere? Bargain-basement pricing at Oracle (Nasdaq: ORCL ) , seems to be the answer.
Now standing at 12.2% of his holding, it seems that he has taken advantage of a temporary trading range of $26 or so to build a stake -- and a stake that is already likely to be showing a profit of 20% or so, given Oracle's present price of $31.
Granted, for investors wanting to follow suit, the usual value indicators aren't flashing "buy" to the same extent: A trailing 12-month P/E of 15.9, for instance, is only marginally below the industry average, as are Oracle's price-to-book and price-to-free-cash-flow metrics.
One to watch, then, to see what Klarman does next.
Closer to home
Since its inception in 1982, Baupost has clocked up gains of close to 20% annually, with only two negative years -- 1998 and 2008.
Woodford, too, can boast a stellar long-term record. On a dividend reinvested basis over the 15 years to Dec. 31, 2011, he's delivered a return of 347%, versus the FTSE All‑Share's distinctly more modest 42% performance. Not surprisingly, with a track record like that, he looks after two of the country's largest investment funds, and runs more money for private investors than any other City manager.
Download the report -- which profiles eight of his largest holdings -- and see for yourself the shares that are powering his portfolio, as well as the investing logic behind them. It's free, and can be in your inbox in seconds. So what have you go to lose?
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