Missed Klarman’s 47% Gainer? His Other Value Pick

Seth Klarman, manager of the $4 billion Baupost hedge fund has a deserved reputation as one of the smartest value minds around. So when the fund’s second quarter 13-F hit the wires, it was well worth taking note that he spent $595 million building a 15% position in Micron Technologies (MU) during the second quarter. That vaulted the new Micron stake to fourth position in the very concentrated portfolio; the top 10 holdings account for more than 90 of assets. ViaSat (VSAT) at nearly 20% of assets is the largest Baupost stake, followed by BP (BP) at 19% and Theravance (THRX) at 15.8%.

But as this stock chart shows, following in Klarman’s venerable footsteps could be a misguided move as the stock has been on a massive tear.

MU Chart

MU data by YCharts

That’s a 47% rise since April 1. The run began May 1. The average Micron share price during the quarter was $11.08.

You get the idea: this is one holding that had an immediate run when it was added. Given that Klarman titled his influential book “Margin of Safety: Risk-averse Value Investing Strategies for the Thoughtful Investor” it’s not a stretch to assume a chunk of that safety seems to have disappeared even before the trade became public. The price to book value has more than doubled since the beginning of the year, and is now at a 10-year high. (Btw, Klarman’s book is out-of-print; recent Amazon offers started at around $1,000.)

If you’re interested in diving into some investment research of a Klarman holding, BP is still very much a value stock whose time has yet to come. Klarman established a 10% stake in BP in the second quarter of 2011 when the average price during that quarter was $44.47. Klarman has been actively trading the stock every since, but overall has been a net buyer. In the second quarter of this year another 8% increase in Baupost’s BP shares brought the stake to 18.6 million shares (19% of fund assets). The average price last quarter was $41.34, 7% less than the average price when he first built the position.

BP is, of course, still wrangling over its ultimate financial responsibility in paying damages for the Deepwater Horizon spill in the gulf. If you think that liability is a never-ending black hole, you’re not going to touch the stock. Free cash flow has indeed fallen from more than $10 billion prior to the disaster to a negative -$2.63 billion in the trailing 12 months.

But if you’re a patient sort and can wait out the continuing legal tussles, you can see a company that is indeed growing revenue and repairing its EPS, selling at a fire-sale PE ratio of 5.1.


Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.



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