Exclusive: Seth Klarman’s Secret Holdings

December 27, 2011, 10:59 am

≫ Next: Baupost Might Lose Money on Mega-quarry Investment

Seth Klarman photo

By Kim Palacious

This is part of a new series of investigative journalism, to report what the media has not reported or piece together many facts into an interesting article about famous investors, recent events etc.

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Which information would you rather be privy to? The location of Jimmy Hoffa’s body, the secret recipe for Coca Cola, or the inside scoop on what The Baupost Group’s Seth Klarman is really buying? If you knew the answer to the third, you might find yourself in a position to buy the answers to the second and first; at a lifetime gain of 20% since its 1983 inception, those lucky enough to be Baupost clients have seen staggering returns.

But how indicative are its public holdings of its complete portfolio? Of the rumored $23B under investment, only ~$3B have been disclosed via its 13Fs. That means some $20B are distributed among the many categories which need not be disclosed, according to SEC rules: short positions, commodities, currencies, and trading activity in other markets, not to mention any domestic equities that might reveal the fund’s investment strategy.

Is it all as secretive as it sounds? A glance at the most recent two Baupost Group 13Fs, however small a part of the portfolio it represents, reveals quite a bit. Add in what the rumor mill is saying and what Klarman himself has revealed in recent weeks, and greater insight into the whole of the $23B portfolio might be achieved.

What the 13F Says

A 26% increase in disclosed Q3 2011 holdings (that’s an incremental $620m in investment) over those reported at the end of Q2 saw most of the increase go toward larger positions in BP (a $252m increase has nearly doubled Baupost’s position), PDL BioPharma (+$33m, a 64% increase over Q2), and new positions in three additional companies: Hewlett-Packard ($464m), Genworth Financial ($57m), and NovaGold Resources ($32m). A fourth company—News Corporation—also saw a “new” $67m investment in subordinated shares, though Baupost already had a $335m position in News Corp Class A shares, which it had decreased by $10m by the end of Q3 (two years ago, it held Class B shares as well).

Significant disinvestment was seen in Viasat (-$85m, or 20%) and Alere (-$52m, or 46%). Baupost sold its positions with Capital Source (-$59m) and Audiovox ($-6m) altogether. Aside from the aforementioned, Baupost reduced its position in another 11 of the remaining 15 legacy holdings, rebalancing its portfolio by a few billion dollars here and there to support an apparent shift in industry focus.

A 6% surge in both Basic Materials and Technology company holdings concurred with a 8% drop in Health Care holdings in the overall industry-level distribution (huge purchases in Hewlett-Packard and BP were largely responsible for the distribution swing). There was another phenomenon: at times, Baupost remained loyal to a sector (Gold, for one) but reallocated funds among firms in related businesses, indicating in which portfolio companies Baupost anticipates the brightest outlook.

An investor who copied Baupost’s holdings on September 30^th would have earned a 15.5% return by December 20^th, just 81 days later.

What the Rumor Mill Says

To begin, some speculate that the Baupost portfolio holds as much as 30%, or ~$9B, in cash. When added to disclosed holdings, that leaves some 60% or $18B, allocated to other investments.

Two rumored foreign investments include UK-based Spirit Pub Company, and South African retail giant, Edcon. According to sources close to the Baupost Group, the fund has invested in the pub giant’s bonds, in support of the entity’s long-term expansion strategy (which includes both an owned and leased restaurant and pub portfolio). The company saw sales growth of 6%-7% in the most recent quarter among existing locations. Announced plans include a complete refurbishment of the Chef Brewer brand, and an expansion of the Fayre Square, Flaming Grill, and John Barras brands

Edcon was founded in South Africa and has been in business since 1929; it has seen expansion to five African nations and now has upwards of 1,000 retail stores that play in everything from clothing, to footwear, to textiles (CFT); the company has grown by acquisition and . It continues to grow geographically as well as in terms of product and brand diversification and is the leading CFT retailer in South Africa; Baupost reportedly admires its business model.

Also noted by insiders were Baupost’s lack of confidence in the pulp and paper sector (certainly a response to the demise of the print media industry), which reportedly culminated in Baupost shorting bonds in NewPost Paper, which primarily supplied stock to print magazine and catalog distributors and was the largest coated paper manufacturer in North America. The Cerberus-owned paper maker filed for Chapter 11 protection in September. It had $3B in debt but had secured $600M in bankruptcy financing from lenders including J.P. Morgan Chase, Barclays, and Wells Fargo. The company lost money every year since the 2005 Cerberus $2.3B LBO.

Other reported activity includes the purchase of Targacept (TRGT) subsequent to a November 8^th announcement that Phase 3 clinical trials of TC-5214, an adjunct antidepressent therapy, did not show tangible effects compared to those seen in patients receiving a placebo. Though shares of Targacept fell 60% on news of the announcement, and saw additional double-digit drops in the weeks since, the company remains undervalued vis-à-vis its market cap; where as cash per share is valued at $5.49, it last traded (on December 23^rd) at $5.29.

What Seth Klarman Says

In the words of the Baupost head himself, in a November interview with Charlie Rose, Seth Klarman views himself at only the first stage of his interpreted view of Warren Buffet’s method of investing. Said Klarman, “Warren evolved through three stages. He evolved from buying cigar butts and getting the last few puffs for free, to buying great businesses at really cheap prices, to buying and holding great companies at so-so prices… I’m still in phase 1. We’re still buying cigar butts.” The referenced second stages practiced by Buffett, buying great companies at great prices and buying great companies at so-so prices, seemed off of the table for Klarman, who clearly indicated such strategies would be in the distant future, if they are yet to come.

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Baupost Might Lose Money on Mega-quarry Investment

January 30, 2012, 8:59 am

≫ Next: Hedge Fund Assets Soar Under New SEC Laws

≪ Previous: Exclusive: Seth Klarman’s Secret Holdings

Bauposts' highlands investment in ontario

The economics of The Baupost Group’s Ontario mega-quarry investment continue to unfold strangely, with new statements made in a January 12^th Town Hall Meeting between Highland Companies executives and local parties adding clarification.

Back-of-the-envelope math once told a story that estimated $43B profits for the mega-quarry project. This was based on the assumption that most or all acreage named in the proposal (2,316 of Highland’s 9,000+ acre holdings) would be used for the extraction of aggregate, and would yield an estimated $18M revenue per acre. Yet, pointed questions around the specific use of the land told a different financial story.

Most notable are extraction volume projections that fall far below early estimates, a useful life operating period that doubles the benchmarked average, a reinforced commitment to limit the market to Ontario Province, and cost concessions that will further erode profits. Messrs. John Lowndes (a co-owner), John Scherer and Joseph Izhakoff, all principals of the Highland Companies supplied the referenced clarifications at the meeting.

Extraction Volume: Acreage Caps and Operational Levels

Though the proposal references 2,316 acres in mega-quarry land, Highland clarified that operations would ramp-up slowly. Further, maximum extraction would take place only on 300 acres at a time and extraction would take place only 270 days a year. Messages underscoring gradual installation and smaller-scale operations were mentioned to mollify local opponents. Yet, downsized production may be of little appeal to investors.

For one, investors want returns to arrive as robustly, and as early, as possible. A slow ramp-up means delayed revenues, and a 300-acre limit means less inventory to supply market demand; and Highland executives indicated that the largest opportunities are short-term. Referencing the “State of the Aggregate Resource in Ontario Study”, conducted in 2010 with the participation of “the Ministry of Natural Resources, the Niagara Escarpment Commission, Gravel Watch Ontario, and members of the scientific and planning communities,” demand will increase by 13% between 2011 and 2030. That doesn’t give Highland much time to get a mega-quarry project approved, built, ramped-up, and operating at full steam.

Useful Life: From 50 to 100 Years

Also of note was the statement that the quarry was expected to be in operation for between 50 and 100 years. In alignment with University of Indiana’s geological survey aggregate industry benchmarks, ValueWalk estimates assumed that the quarry would see a 50-year (the industry average) useful life. Yet, an expected life that could double that does two things: for one, it stretches out total profits over a longer return period; second, it calls into question long-term supply and demand alignment. How can Highland guarantee that it will sell aggregate only in Ontario over such an extended period of time?

Reinforced Commitment to Sell Only in Ontario

If there is one message Highland has touted consistently, it is the company’s commitment to making business decisions that support local communities. During the 1/12 session, Highland executives said over and again that the aggregate was to be sold only in Ontario to support regional growth. Yet, Ontario aggregate demand has only been projected out 20 years, and stiff competition from other (smaller) quarry project proposals wishing to take advantage of this short-term demand increase may find the year 2030 full of aggregate suppliers in Ontario without a market to sustain them.

Other Profit-Jeopardizing Developments

In addition to clarifications that gave a better sense for the timing and scale of revenues, answers to other questions revealed cost structure implications. For one, Highland admits that it does not ultimately know its cost obligation in an area that has been a huge issue for opponents: roads. “We have never published any numbers regarding the specific numbers of trucks expected from our facility, which is directly related to market demand,” executives said at the meeting. Though the company’s traffic consultant (Morrison Hershfield Limited) has said that Country Route 124 should have adequate capacity, Highland acknowledged “any required road improvements will be paid for by us.”

Highland is also on the hook to be accountable for more than 3,700 project concerns submitted by concerned groups and citizens and forwarded by the Ministry of Natural Resources from the Environmental Bill of Rights, the remediation of which will take time and will likely also cost them money.

Finally, problems have now reached beyond Melancthon, as a wider group of opponents in Southern Ontario has organized to fight an accelerating influx of quarry project proposals. According to the Globe and Mail, the province’s ten top aggregate-producing municipalities have formed a coalition that has proposed legislation to demand higher royalties for road repair, improved land rehabilitation oversight, and greater stringency with respect to environmental analysis. The coalition has recommended particularly restrictive rules for quarries proposing to operate below the water table, as the Highland Companies’ project does.

The New Math

So, what does all this tell us? The production volume is so much smaller than anticipated and road for the Highland quarry is becoming so long that the numerator (annual revenues from aggregate production) will be smaller, the divisor(the revenue-earning/payback period) larger and the quotient (annual revenues), therefore, much smaller. This means a longer overall investment payback period, and does not accurately predict whether the project will be able to go online with timing advantageous to the Ontario aggregate industry growth window.

When questioned in December about whether investors would be open to a smaller scale excavation plan, Mr. Izakhoff told the Globe and Mail that it was “too soon to tell” but underscored that it was not the company’s first choice to disaggregate the application into smaller projects. He also commended Highland for its transparent approach, saying, “Our view was that this was a very responsible way to do it. Put all our cards on the table.”

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Hedge Fund Assets Soar Under New SEC Laws

April 16, 2012, 6:32 am

≫ Next: Bank of America Given Leeway In Mortgage Bond Case

≪ Previous: Baupost Might Lose Money on Mega-quarry Investment

The listed value of assets under management at many hedge funds is increasing by huge magnitudes as funds comply with the Dodd-Frank bill and file with the SEC. Under the new regulations firms must register with the SEC and must for the first time disclose the value of assets they have that are financed by borrowing.

That rule change is having a multiplication effect on the figures given by the funds and the trend will continue as more funds register with the regulator and the true value of their assets is found out. The news was reported recently by Miles Weiss at Bloomberg.

To give some example of the scale of multiplication involved in the recent requirements; the fifty largest funds under management under previous rules were worth a total of $613 billion, while under the new rules they are worth around $1.35 trillion, an increase of more than double.

One of the biggest movers in the new regime was Ken Griffen’s Citadel which listed having $12.6 billion in Net Assets though its filings with the regulator show it has $115.2 billion in assets. That’s a rise of over 910% in listed value. Seth Klarman’s Baupost is now worth around $24 billion in its filing with the regulator.

The move, and the significant increase in the scale of measurable assets, might lead to greater federal oversight of funds as the SEC sees the rate at which the firms are leveraging themselves more clearly.

This will be one of the most prominent early features of the Dodd Frank bill and will serve as an interesting precursor to the regulator’s handling of the coming rules contained in the bill. The new rules will also require hedge funds to disclose their assets in the same way on a quarterly basis, something we have previously reported is driving many of them to become family offices rather than traditional funds.

The provisions of the Dodd Frank bill are making many in the investment sector very nervous and this will not ease tensions in the industry. Investors will be worried about pressure from regulators continuing to be an obstacle as it has in the past couple of years.

Since the 2008 financial crisis regulators have much more ably let their presence be felt on Wall Street. The multiplication in assets under the new filing guidelines will have many nervous about becoming a target as their leveraged assets become obvious and their size becomes more attractive to overseeing eyes. The effect this has on day to day business will surely be seen in the coming year, though from recent reactions much can already be ascertained.

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Bank of America Given Leeway In Mortgage Bond Case

April 25, 2012, 6:49 am

≫ Next: Klarman’s Baupost Buys NCQ, HES, GNW, ORCL Adds to BP, HPQ VSAT and NG

≪ Previous: Hedge Fund Assets Soar Under New SEC Laws

Bank of America Corp. (NYSE:BAC) executives will be breathing a sigh of relief today after a New York Supreme Court Justice refused American International Group Inc. (NYSE:AIG), Seth Klarman’s The Baupost Group (AKA Walnut Group) and others have had their petition to have the case against Bank of America turned into a plenary action in order to . The move will save the bank from a much wider and deeper inquiry into its dealings with mortgage binds in the time surrounding the financial crisis.

Currently the inquiry into Bank of America is an Article 77 hearing. An Article 77 is a limited process usually used for trust hearings. The move to have the type of hearing changed was made to avoid the $8.5 billion settlement agreed to by Bank of America and most of the other investors in the case. Those investors which also included Blackrock (NYSE:BLK) and MetLife Inc. (NYSE:MET).

Those investors believe that the agreement that has been reached leaves Bank of America underpaying them massively. 22 of the investors believe the deal that was reached was adequate, but some are holding out in hopes of a more favorable settlement or decision by the court.

The suit relates to Bank of America’s Countrywide operation which it purchased for $2.5 billion in 2008. Investors have alleged that that financial institution misled them into investing in mortgage bonds that subsequently lost most of their value in the wake of the 2008 financial crisis. The Bank is obviously willing to settle the case in order to put a plug in the matter and move on, though that attitude does not sit well with some of those who took the losses.

The case is one of many ongoing processes seeking to unravel the deals made in the lead up to the crisis that may have been fraudulent in one way or another. It signals the continuing mode by major financial institutions to define themselves in terms of that event even as revenues continue to slip. The continued devotion to such issues may turn out worse for the firms objecting to the terms as legal fees mount up and chances of success seem to be getting slimmer.

Although the consumer market is recovering, as evidenced by credit results from financials earnings, the investment market is moving in the opposite direction. Increased regulatory pressure and the coming Dodd Frank bill have caused many to question the returns offered by the institutions and in turn demand lower fees from investment funds.

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Klarman’s Baupost Buys NCQ, HES, GNW, ORCL Adds to BP, HPQ VSAT and NG

August 13, 2012, 2:00 pm

≫ Next: Klarman’s Baupost Group Goes Up Against Bear Sterns in Court

≪ Previous: Bank of America Given Leeway In Mortgage Bond Case

Seth Klarman’s Baupost Group is out with their latest 13F. Before looking at some of the new positions, we have details on the exact allocation of the entire $24 billion, the famous value hedge fund manager runs. US equities which show up on the 13F represent only a fraction ($3.8 billion or 16% of total aum) of the securities. As we reported earlier this is the breakdown:

Cash is 28%

Distressed debt 23%

Equity exposure (foreign and domestic) 20%

Real estate 16%

The remainder of assets is in hedges and structured products.

Seth Klarman added to the following already held stakes:

Hewlett-Packard Company (NYSE:HPQ), the fund owns 27 million shares, and it makes up 15% of the current portfolio

BP Plc (NYSE:BP) (LON:BP), Klarman owns 13M shares or 14.42% of the fund’s portfolio. BP Plc (NYSE:BP) (LON:BP) is still the largest domestic stake in the portfolio followed by Hewlett-Packard Company (NYSE:HPQ). We discovered that Klarman owns 26Million shares of Vivendi, which could be a larger holding than BP Plc (NYSE:BP) (LON:BP). Michael Price, who Seth Klarman calls his mentor, also purchased stake in HPQ this quarter.

NovaGold Resources Inc. (NYSEAMEX:NG) (TSE:NG), 16M shares, slightly over 2% of assets reported in the 13F

The firm now owns 1oM shares of Idenix Pharmaceuticals, Inc. (NASDAQ:IDIX), making up 2.7% of reported assets.

Baupost now owns over 16 million shares of ViaSat, Inc. (NASDAQ:VSAT), which accounts for 10.62% of reported assets.

Some of the new positions include some familiar large caps, and some not so familiar names:

Klarman purchased 15.8million shares of Oracle Corporation (NASDAQ:ORCL), which equals 15% of assets, 15M shares of Genworth Financial Inc (NYSE:GNW) or approximately 2% of stated assets.

One Million shares of Hess Corp. (NYSE:HES), equal to 2% of assets reported in the 13F.

3.2 million shares of Novacopper Inc (NYSEAMEX:NCQ), which is less than 1%.

Klarman sold out of two negligable stakes in Multimedia Games Holding Company Inc (NASDAQ:MGAM), and Alere Inc (NYSE:ALR)

Disclosure: Long BP, not other positions

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Klarman’s Baupost Group Goes Up Against Bear Sterns in Court

September 13, 2012, 12:53 pm

≫ Next: Theravance Royalty Deal With Elan, Good For Baupost, Fidelity

≪ Previous: Klarman’s Baupost Buys NCQ, HES, GNW, ORCL Adds to BP, HPQ VSAT and NG

We saw the curtain drop on Walnut Place, aka Seth Klarman’s Baupost vs Bank of America Corp (NYSE:BAC), back in July. The hedge fund withdrew its challenge to the offer of a $8.5 billion settlement, and apparently decided to just take what it was offered. The last time, when Baupost decided to battle Bank of America Corp (NYSE:BAC) in court, it used the pseudonym of Walnut Place. This raised several confusions about the identity of the actual litigator behind the filing. It seems that Boston based Baupost Group has struck once again to regain its losses in mortagage backed securities.

Reuters reported an amended complaint that was filed on September 4th in the Delaware Chancery Court by Law Debenture Trust Company of New York. The complainant is a trustee for Bear Stearns MBS trust. The filing demands for the payment of 1,141 underlying mortgage loans from the EMC (Eastern Mortgage Capital) unit of JPMorgan Chase & Co. (NYSE:JPM). EMC used to be the mortgage lending unit of Bear Stearns. The complaint does not mention Baupost directly, but Reuters mentions that a relatively older status report clarifies the identity, ”A representative of the directing certificateholders attended the meet-and-confer sessions on August 6 and 7,” the report said. “The directing certificateholders are the Ashford Square Entities, which are wholly-owned subsidiaries of funds managed by The Baupost Group.”

The filing asks for the repurchase, on grounds of misrepresentation of warranties by EMC. The litigation began in Feb 2011, and the amended complaint details specific stats and examples of how EMC overlooked the underwriting standards, and allowed unqualified borrowers into the business.

The lead complainant behind the put-back litigation was also confirmed by Harvey Wolkoff of Ropes & Gray, who is the lead counsel behind this new round of litigation. The amended complaint asks for a larger number of loans, while the previous filing sued for 800 loans. Baupost has been exploring the underlying MBS since 2009. Wolkoff has also commented on EMC’s lack of interest in leveling with the complaints, the EMC unit has only agreed to buy back some 54 loans, when the actual filing now asks for repurchase of over 1000 underlying mortgages.

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Theravance Royalty Deal With Elan, Good For Baupost, Fidelity

May 13, 2013, 8:51 am

≫ Next: Seth Klarman’s Baupost Group Buys A Chunk Of Spanish Shopping RE

≪ Previous: Klarman’s Baupost Group Goes Up Against Bear Sterns in Court

Fidelity Investments and hedge fund Baupost Group LLC, who hold substantial stakes in Theravance Inc (NASDAQ:THRX), gained on Monday after the biopharmaceutical company entered into a deal for a $1 billion royalty with Irish drug maker Elan, reports Reuters.

Theravance Inc (THRX) Stocks Are Up

Theravance Inc (NASDAQ:THRX) stocks were up 13 percent on Monday in early trading, to $39.62 on NASDAQ. Including today’s movement, the stock has gained about 70 percent since April.

Hedge fund Baupost holds about 13.6 million shares of Theravance, which is almost equal to a 14 percent stake in the pharmaceutical firm. Fidelity along with its Fidelity OTC Portfolio owns about 13 million shares granting a 13 percent stake. Fidelity and Baupost are among the largest shareholders for Theravance, while GlaxoSmithKline (ADR) (NYSE:GSK) (LON:GSK) with a 27 percent stake is the biggest shareholder.

Terms of Deal

Elan, in order to maintain its independence, will acquire 21 percent of the royalties that Theravance Inc (NASDAQ:THRX) receives from GSK.

Drugs included in the deal include Breo Ellipta, which just got clearance from the U.S. Food and Drug Administration, and two other treatments in late-stage testing. Apart from these, Anoro Ellipta has also been named in the deal. Anoro Ellipta is a treatment for chronic obstructive pulmonary disease, and the drug makers are currently seeking regulatory approval in both the United States and Europe.

The U.S. Food and Drug Administration, on Friday, cleared Breo Ellipta for some treatments, and the drug will be called Relvar Ellipta in Europe, where it is still under review.

The royalty deal is expected to be completed by June, provided it gets the backing of Elan’s shareholders. Elan may mobilize 20 percent of its revenues from the agreement to return to the shareholders in the form of dividends. There have been reports that Elan might have received a takeover bid from New York-based Royalty Pharmaceutical.

Baupost Holdings

At the end of 2012, Baupost had $28.1 billion in assets, as per the filing with SEC. Seth Klarman’s Baupost Group has reduced its exposure in equities in the third quarter last year, significantly, including a cut of Theravance Inc (NASDAQ:THRX). Other significant cuts in Q3 were in Hewlett-Packard Company (NYSE:HPQ) by approximately 46 percent, and BP Plc (NYSE:BP) (LON:BP) by approximately 16 percent. For the fourth quarter, Baupost sold more than 3 million shares of Oracle Corp and 4 million shares of News Corp (NASDAQ:NWSA). The fund increased its holding in NWS and Idenix Pharmaceuticals, Inc. (NASDAQ:IDIX). For the fourth quarter, no major activity was noticed for Theravance Inc (NASDAQ:THRX).

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Seth Klarman’s Baupost Group Buys A Chunk Of Spanish Shopping RE

February 17, 2014, 7:56 am

≫ Next: Hottest Links: The Great Divide, Action Levers, And Scaredy-Cats

≪ Previous: Theravance Royalty Deal With Elan, Good For Baupost, Fidelity

Legendary value investor Seth Klarman’s Baupost Group is a part of the consortium that picked up seven Spanish shopping centers/galleries and a retail park in the port city of Alicante for €160 million. GreenOak Real Estate, a New York-based investment firm founded by former Morgan Stanley executives and headed by Chris Niehaus, is another member of the consortium. So is Grupo Lar, a Spanish company known as a property asset manager and investor with development skills.

Vastned, the seller of the properties, is a listed European retail property fund focused on premium shopping venues.

In its press release, Vastned said the transaction would reduce its “exposure to on-going capital requirements and economic risks associated with these challenged secondary Spanish shopping centres and the related continued pressure on rental income.” Vastned also said the sale proceeds of the “non-strategic” assets would be used to redeem loans, including mortgages related to those assets.

“Although the shopping centres have always contributed to the direct investment result, they had a highly negative impact on the value developments in the total property portfolio,” said Vastned CEO Taco de Groot. “We believe the value of the portfolio would decrease further due to the unfavourable outlook, the significant capital requirement and continuing pressure on rental income.”

Key terms of the transaction

Here is a slide from Vastned’s presentation on the deal.

Vastned’s perceived downsides to continued ownership

Note the yellow-highlighted portions in the above slide. It cites limited potential, oversupply of similar RE, and significant upcoming capex due to the age of these shopping centers as some of the key reasons for the divestment.

Baupost’s investment outlook

At this stage one can only guess that Klarman and partners viewed the deal as cheap enough to justify the risks.

Note that Klarman is not averse to sit on cash for extended periods of time awaiting opportunities for value investing. Baupost is said to have had nearly $14B in cash, nearly half of its assets under management, as of late October 2013. In fact, in view of the dearth of investible avenues, Klarman’s Baupost has decided to return money to investors, the second time in a few years.

Probably, the Spanish deal offered a valuable margin of safety, considering Vastned’s admission that the deal was concluded at a value that was “29% below the latest appraisal value at 31 December 2013 of € 226 million.”

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Hottest Links: The Great Divide, Action Levers, And Scaredy-Cats

March 3, 2014, 11:40 am

≫ Next: Klarman On Tesla Motors Inc, Netflix: Bubbles, Bubbles, Everywhere

≪ Previous: Seth Klarman’s Baupost Group Buys A Chunk Of Spanish Shopping RE

Hottest links for Monday, March 3rd, the late edition. Get our free daily newsletter and never miss a single linkfest. Also, now if you sign up you will get our new e-book on value investing.

Top stories for today are included below. To kick off your work week, we’ve got some great stories, including how you too can be lucky, a wide-moat Asian company, and small cap falling out of favor.

Hottest Links: Stories

Value Investing

How to get Lucky

I don’t remember what exactly changed my opinion. But I do remember that when I read Malcolm Gladwell excellent book Outliers: The story of success, somewhere around 2009, it had significant impact on me. [Contrarian Edge]

The End of Behavioral Finance?

In the piece Thaler not only predicted that we would look back at the 1999 and surrounding Internet craze as the “Great Internet Stock Bubble”, but he also predicted that behavioral finance would become the norm in the field of economics. [Cullen Roche, Pragmatic Capitalism]

Value investors might be better off on vacation

The mood is glum in Valueville these days. Conditions are so depressed that its inhabitants can be spotted packing up their Bloomberg terminals and heading off on extended vacations. [Norm Rothery, The Globe And Mail]

Investment Decisions Should Be Valuation-Based

Investment decisions should be valuation-based because the price you pay is the biggest determinant of your long term return on investment. All investment decisions are based on probability because no one has the ability to accurately forecast the future. This makes optimizing your positive probabilities a key to successful investing. [Ken Faulkenberry, The Arbor Investment Planner]

The Intelligent Investor: The Investor and Inflation (Chapter Two)

This is the third discussion of the ModernGraham Book Club’s reading of The Intelligent Investor by Benjamin Graham (affiliate link). In last week’s discussion, we talked about the first chapter, dealing with the results to be expected by Intelligent Investors.. [Benjamin Clark, Modern Graham]

Can You Guess This Asian Wide-Moat Company?

Our latest monthly issue for the month of March investigates the “Middleby of Asia,” commanding a dominant market share of over 80% in hypermarkets, 50% in chain outlets, 30% in 4- to 5-star hotels in China and an overall 30% in its home market. [Koon Boon Kee, BeyondProxy]

Inside Wall Street’s Frat: Kappa Beta Phi

Wall Street’s secretive fraternity is getting a bit of attention this month, thanks to Kevin Roose’s new “Young Money.” The book, which details the mundane experiences of eight young Wall Street bankers, devotes a chapter to Kappa Beta Phi and its 80th induction dinner in 2012. [Stephen Grocer, MoneyBeat]

Funds

Seth Klarman: Fed Created Truman Show Style Faux Economy

Seth Klarman’s fund, which in 2013 had a high of 50% of his portfolio in cash, up from 36% in 2012, posted 2013 returns in the mid-teens consistent with the fund’s nearly 22-year track record. [Mark Melin, ValueWalk]

We analyzed 37 years’ worth of Warren Buffett’s shareholder letters.

This year Buffett used 138 words in his letter he had never used before, including “timid,” “fluctuation,” “Texas-sized,” “geography,” and “soybeans.” In certain years Buffett has grown the letter’s lexicon more than the year before. This year was not one of them. [David Yanofsky, Quartz]

5 Low PEmg Companies for the Enterprising Investor

Enterprising Investors may also be interested in reviewing 5 Undervalued Companies for the Enterprising Investor such as Ford Motor Company (NYSE:F), Capital One Financial Corp. (NYSE:COF), Unum Group (NYSE:UNM) and more, while also conducting further research into the following companies. [Benjamin Clark, Modern Graham]

Small Cap Out of Favor

Aeropostale Inc (NYSE:ARO) stock price is now at 2003 levels. Cash fell to 68 million (10/31/2013) from 100.30million (07/31/2013). Yet an unused 175 million credit is available. [ShadowStock]

QE’s Greatest Beneficiaries

Quantitative easing “worked” for all of us, but it worked much better for some than for others. Its greatest beneficiaries have been, perversely, those who’ve needed its help the very least. [Joshua M Brown, The Reformed Broker]

Buffett Tells Investors to Get Real About EBITDA

The best part about Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) CEO Warren Buffett’s annual investor letters is that they always provide some kind of reality check. [Herb Greenberg, Herb On TheStreet]

A China Fraud Dissected: Part 2 AgFeed’s Auditors

In July of 2013, the company filed for Chapter 11 bankruptcy. Lawrence’s story provides the background you’ll need to appreciate what I’m going to talk about next. See Part 1 Milton Webster, AgFeed Audit Committee Member and Whistleblower, on this blog for more on this case. [Francine McKenna, re: The Auditors]

Those Action Levers in the Back Office

Celent’s new report on risk management and the value chain identifies five “action levers” that financial firms, especially those heavily involved in derivatives positions, should consider in the course of navigating the rapids of the present market and regulatory scene. [Christopher Faille, AllAboutAlpha.com]

Do Tim Cook care about the “bloody stock price”?

Tim Cook has got a lot of favorable press for confronting an investor group at the last Apple Inc. (NASDAQ:AAPL) stockholder meeting and telling them that he does not check the “bloody IRR” when he has to do the “right thing”. [Aswath Damodaran, Musings on Markets]

US investors biggest scaredy-cats in the world

A new survey from Schroders, a multinational investing firm that manages $415 billion for clients, shows U.S. investors ranking at the bottom of 25 countries in terms of confidence, with just 37 percent showing a positive view. [Jeff Cox, NetNet]

You shouldn’t buy this stock at any price

Ben Graham advocated that we should always follow a cardinal rule if we truly believe in the value investing philosophy: buy cheap. [David Foulke, Turnkey Analyst]

George Soros Is Not a Gangster

Last week, Forbes released its annual score card of top-earning hedge fund managers. The usual gang was there: Soros, Tepper, Cohen, Paulson, Icahn, Simons, Dalio, Griffin, et. al. That clickbait scorecard — it worked on me — led to a strident column from Gawker, bizarrely titled “Fund Managers Are the Biggest Gangsters of All.” [Barry Ritholtz, BloombergView]

The Great Divide over Market Efficiency

The Noble committee decided to split the economic prize between Eugene Fama and Robert Shiller – and that’s okay. [Clifford Asness and John Liew, Institutional Investor]

Hottest Links: Not The Onion

Koala escapes at zoo, falls asleep before he can do anything interesting

San Diego Zoo staff recovered Mundu, a 2-year-old male koala, after he managed to slip out of his enclosure. Staff spotted Mundu sleeping in the treetops above his enclosure, and they were able to coax him down after the zoo closed. [SmartBrief]

The post Hottest Links: The Great Divide, Action Levers, And Scaredy-Cats appeared first on ValueWalk.

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Klarman On Tesla Motors Inc, Netflix: Bubbles, Bubbles, Everywhere

March 5, 2014, 11:00 am

≫ Next: Seth Klarman Annual Letter Takeaways: History, Earnings, Nosebleeds

≪ Previous: Hottest Links: The Great Divide, Action Levers, And Scaredy-Cats

In the latest investor letter, Seth Klarman of Baupost Group discusses the "nosebleed" valuations of Tesla Motors Inc (TSLA) and Netflix, Inc. (NFLX)

After a sizzling 2013, Tesla Motors Inc (NASDAQ:TSLA) and Netflix, Inc. (NASDAQ:NFLX) remain Wall Street darlings, but Baupost President and CEO Seth Klarman thinks this is merely a byproduct of an extremely bullish market. In his latest letter to investors, a copy of which was reviewed by ValueWalk, the tone was largely one of warning about growing bubbles, rising risk and “inadequate potential return almost everywhere one looks.” He also explained that it seems like technology companies are valued more for what they plan to do rather than what they have already done. (see part i and part ii here)

Building a “coalition of willing”

There’s no denying that last year was one of the best years for U.S., European and Japanese stocks in decades. As Klarman notes, key indexes S&P 500, the Dow Jones Industrial Average, the NASDAQ Composite and the Russell 2000 continued to post multi-year or record highs throughout the year. In fact, 2013 was the S&P 500’s best year since 1997. And he says the key drivers were the stocks of “fashionable companies” like Tesla Motors Inc (NASDAQ:TSLA) and Netflix, Inc. (NASDAQ:NFLX), which were driven up by investors willing to participate in the highly speculative bull market that’s been going on.

Because of how bullish the markets were last year, he said favored stocks like those two companies and other “Internet favorites” like LinkedIn Corp (NYSE:LNKD) began to “become unmoored and unbounded.”

When business plans are worth more than profits

Klarman’s big problem with Tesla Motors Inc (NASDAQ:TSLA), Netflix, Inc. (NASDAQ:NFLX), and other cult stocks is the fact that their valuations appear to be based on speculation. For example, he notes that Tesla’s P/E is around 279, while Netflix was valued at around 181 times estimated 2013 earnings. LinkedIn Corp (NYSE:LNKD) has a P/E of 145, while Amazon.com, Inc. (NASDAQ:AMZN), which has a $180 billion market capitalization, traded at 515 times estimated 2013 earnings.

He also pointed to Twitter Inc (NYSE:TWTR), which soared from $26 to $45 a share on the very first day of trading. It was priced “at only twenty times its projected 2015 revenue” and has yet to turn a profit. He says one analyst suggests that Twitter might reach $50 million in “adjusted” cash earnings this year, which makes its P/E more than 500.

In short, Klarman sums up his apparent exasperation at the high valuation of these technology companies quite well with this statement:

“In Silicon Valley, it seems that business plans – a narrative of how one intends to make money – are once again far more valuable than many actual businesses engaged in real world commerce and whose revenues exceed expenses.”

Of course bull markets will always come to an end eventually, but what we don’t know is when or exactly how much those speculative stocks will be affected. Such corrections can be just as spectacularly bad as they were spectacularly good, however.

The post Klarman On Tesla Motors Inc, Netflix: Bubbles, Bubbles, Everywhere appeared first on ValueWalk.

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Seth Klarman Annual Letter Takeaways: History, Earnings, Nosebleeds

March 24, 2014, 7:27 am

≫ Next: Klarman’s Baupost Bets Big On Spanish RE

≪ Previous: Klarman On Tesla Motors Inc, Netflix: Bubbles, Bubbles, Everywhere

Seth Klarman of Baupost is clearly skeptical of two big themes today. (Check out notes from his 2013 annual letter here and here.)

The bull market in the U.S.
The opportunity mindset in Europe.

Remember that his approach and views are freakishly spot on.

Two obvious ones include avoiding the Internet bubble in 1999 and the 2008 crisis.

Klarman isn’t just a smooth talker though. He walks the walk.

During the “lost decade”, Baupost obliterated the averages, returning 14.8% and 15.9% for the 5 and 10-year periods ending December 31^st versus -2.2% and -1.4%, respectively, for the S&P. – Outstanding Investor Digest

While everyone was freaking out during the 2008 crisis, this is what Klarman did.

During the crisis in 2008, Baupost lost “between 7% and the low teens.” Still though, he certainly outperformed the market indices and much of his investment management brethren in a time of panic. – MarketFolly

When Klarman talks, you should listen.

So based on the latest annual letter, here are 3 key takeaways you should know and the implications involved.

Key Takeaway #1

“If you’re more focused on downside than upside, if you’re more interested in return of capital than return on capital, if you have any sense of market history, then there’s more than enough to be concerned about”

Brilliant.

This is related to what Bruce Greenwald means when talking about earnings power value.

If a business is unable to generate more cash than what it needs to operate (or reproduction cost), then it’s just earning enough cash to sustain itself.

This is a tricky comparison.

According to simple metrics, such as return ON capital, the company may be making a killing. But this difference is going to make many investors pour money into overvalued assets and taking on unnecessary risks.

Key Takeaway #2

“Fiscal stimulus, in the form of sizable deficits, has propped up the consumer, thereby inflating corporate revenues and earnings. But what is the right multiple to play on juiced corporate earnings?”

Warren Buffett said that “probably the best single measure of where valuations stand at any given moment” is the Wilshire Total Market Capitalization divided by the US GDP.

As of March 12th, the total market cap highlights a significant overvaluation at about 117.2% of the last reported GDP.

This implies a 1.6% return a year going forward.

Seth Klarman Total Market Cap to US GDP

Total Market Cap to US GDP

Another frequently used tool is the Shiller P/E.

Right now, the Shiller PE reflects a value that is 54.5% higher than the historical mean, also implying a return of 1% for next year.

Shiller PE

The Shiller PE

So what is the right multiple to play on juiced corporate earnings?

The question that Seth Klarman poses is one to reflect upon. As investors look at all the profits taken in recent years, their mouths could be watering. Is the expensive price justified to enter now at the market?

Key Takeaway #3

“On almost any metric, the U.S. equity market is historically quite expensive. A skeptic would have to be blind not to see bubbles inflating in junk bond issuance, credit quality, and yields, not to mention the nosebleed stock market valuations of fashionable companies like Netflix , Inc. and Tesla Motors Inc.”

Look at the yield spreads between high yield bonds and the Treasury spot curve at the moment.

We’re really close to historical low digits, and the spread is 7.25%.

Without question, QE has initiated a search for yield that impacted nearly every market available to investors.

Now look at what this environment is doing to the valuation of actual companies.

Klarman called out two specific companies and grouped them as “nosebleed stock market valuations”

Netflix, Inc. (NASDAQ:NFLX)
Tesla Motors Inc (NASDAQ:TSLA)

Check out the valuation numbers for Netflix, Inc. (NASDAQ:NFLX) and Tesla Motors Inc (NASDAQ:TSLA) which is only going to exemplify Klarman’s example. I’ll come up with a raw estimate of its intrinsic value. Numbers are from the OSV Stock Analyzer Software.

The numbers I’m about to show you are raw numbers without adjustments for predicting “future” growth.Even slight adjustments don’t help these two companies to justify their current price.

Netflix (NFLX) Intrinsic Value and Valuation Ratios

NFLX Intrinsic Value Ranges

NFLX Overvalued Valuation Ratios | Click to Enlarge

Tesla (TSLA) Intrinsic Value and Valuation Ratios

Now check out Tesla.

TSLA Intrinsic Value – Overvalued

How much “future” growth are you really paying for? | Click to Enlarge

The Trend is Your Friend Until it Isn’t

Check the numbers above again. Klarman isn’t exaggerating.

The old adage “the trend is your friend until it isn’t”, is closer than any given point in the past 5 years.

As a value investor, take the market’s optimism with a grain of salt. Use common sense, patience and diligence to protect your capital while achieving satisfactory returns.

Not the other way around.

Howard Marks wrote in one of his memos;

We must strive to understand the implications of what’s going on around us. When others are recklessly confident and buying aggressively, we should be highly cautious; when others are frightened into action or panic selling, we should become aggressive.

What about you? Where are we at now?
This post was first published at old school value.
You can read the original blog post here 3 Key Takeaways from Seth Klarman’s 2013 Letter.

The post Seth Klarman Annual Letter Takeaways: History, Earnings, Nosebleeds appeared first on ValueWalk.

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Klarman’s Baupost Bets Big On Spanish RE

April 21, 2014, 10:00 am

≫ Next: Baupost Group Looks to Real Estate, Greek Bank Warrants

≪ Previous: Seth Klarman Annual Letter Takeaways: History, Earnings, Nosebleeds

Klarman buys Spanish real estate in search of higher returns

Seth Klarman, the manager of the Baupost Group, is known as a savvy, risk-averse investor. Baupost has delivered steady, if not spectacular returns over the last few years. The U.S.-based hedge fund currently holds a more than one billion dollar position in chipmaker Micron Technology, Inc. (NASDAQ:MU).

Given Klarman’s investing philosophy and the Baupost Group’s conservative investment track record, many will be surprised to learn that Baupost just made a more than $200 million (160 million euro) investment in Spanish commercial real estate. Baupost received seven shopping centers and a shipping and logistics park in return for its cash. GreenOak Real Estate joined Baupost as a junior partner on the deal.

Baupost purchased the lot of shopping centers, most near Madrid, from the Dutch real estate group Vastned, who sold the real estate assets to raise capital to reduce their debt load.

Spanish economy bottomed out, thinks Klarman’s Baupost

Spain’s economy is currently in tatters by almost any measure. Government spending has been slashed due to EU-mandated austerity program, the unemployment rate is around 26% and even higher for young people, and commercial real estate and rent prices have plummeted over the last few years.

However, many savvy investors such as Klarman believe the southern EU periphery has finally bottomed out, and Greece, Italy and Spain are due for multi-year economic booms. These investors have backed up their beliefs with their cash, as real estate investment in Greece, Italy and Spain increased by more than 80% from 2012 to 2013.

Analysts suggest it boils down to taking on a little more risk for higher returns. Taking German commercial real estate as an example, analysts say the cost of prime commercial real estate is so high that you can only expect to earn a 4.4% to 4.6% return on your investment.

Make 7% and wait for Spain to recover

According to European real estate analysts, Klarman and Baupost are likely to make as much as a 7% annual return on their investment through rents paid by retailers while Spain recovers. A source close to Klarman says the Baupost fund manager also believes he will be able to sell the prime retail properties for twice what he paid in just a few years.

The post Klarman’s Baupost Bets Big On Spanish RE appeared first on ValueWalk.

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Baupost Group Looks to Real Estate, Greek Bank Warrants

May 20, 2014, 11:00 am

≫ Next: Wunderlich Doesn’t Like Baupost’s ViaSat Stock Pick

≪ Previous: Klarman’s Baupost Bets Big On Spanish RE

As hot markets in the U.S. cause some investors to shy away from equities, Baupost Group is looking to real estate, Greek investments and debt in Arby’s to boost returns

As public markets become “frothy,” with competition driving equity prices high and sovereign debt yields in once risky markets such as Greece to strange new lows – competing with the U.S. in terms of yield, Seth Klarman‘s Baupost Group, like fellow hedge fund icons John Paulson and David Einhorn, is now looking to private investments to uncover opportunity without significant public competition.

Baupost investing in Lehman Brothers after the crash

Baupost was successful at picking up good investments by picking through the bones of the Lehman Brothers estate. In 2013, as in the past two years, the Lehman positions “had the largest impact on results in 2013,” Baupost partner Jim Mooney wrote in an appendix to their fourth quarter investment letter, a copy of which was reviewed by ValueWalk. In 2013 the Lehman positions accounted for a massive 23% of the fund’s net asset value.

See our earlier coverage of Baupost’s 2013 letter to investors here, and here.

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“We received significant distributions from the various Lehman estates during the course of the year,” Mooney wrote. “Life to date, the IRR on all of our Lehman investments is approximately 30%. Lehman has, by any measure, produced a wonderful investment result.”

However, all good things must come to an end, including investments. Baupost had opportunity to additionally invest in Lehman debt but chose to remain on the sidelines. “The Lehman story going forward will be far more about maximizing the value of our remaining positions than adding significantly to them – the inevitable conclusion to any successful liquidation. We still expect to earn attractive risk-adjusted returns on our remaining Lehman Brothers Holdings Inc Plan Trust (OTCMKTS:LEHMQ) positions as distributions continue over the next few years.”

Baupost invests in Greek debt during dark days

Other non-stock related investments came from a handful of opportunistic investments in structured products, with nearly every position profitable. Overall, the structured product category returned nearly 50%, with special mention going to the Greek debt, which “rallied substantially as fears that the country would leave the euro dissipated.” Baupost exited more than half their exposure in 2013.

In the wake of a crippling debt crisis, Greek bond yields climbed to relative high yields. Baupost bought the yields during the scare, and now “Greek bond yields have dropped and bond prices have risen. One sell- side analyst recently declared that ‘the recovery is here,’ a sharp reversal from his view in July 2012 that Greece had a 90% chance of leaving the Euro by the end of 2013,” Seth Klarman, Baupost’s founder, wrote in the fourth quarter investment letter. “Greek government bond prices have nearly quintupled in price from the mid-2012 lows. Yet, despite six years of painful structural adjustments, Greece’s government debt-to-GDP ratio currently stands at 157%, up from 105% in 2008. Germany’s own government debt-to-GDP ratio stands at 81%, up from 65% in 2008. That doesn’t look fixed to us.” Baupost purchased a portfolio of consumer loans and a portfolio of residential mortgages in Greece, which it is now unwinding along with other structured products.

Baupost: Not a value investor’s paradise

We expect to confront an investing environment that remains both competitive and characterized by an ambient optimism. Equity markets hover around all-time highs, many structured product bonds are trading at yields below 5%, the distressed debt market is in hibernation, and most investors appear to believe the most severe hazards have been marginalized, or at least are well over the horizon. This is not a value investor’s paradise.

Public markets “frothy,” Baupost turns to private investment

As competition has driven public markets to new heights, Baupost addresses this competitive (and low yielding) environment by searching for private investment deals. “Amidst frothy public market conditions like today’s, private investments sometimes become more attractive than public for these exact reasons – fewer competitors and better risk-adjusted returns,” wrote Tom Blumenthal and George Rizk, partners and co-head of the fund’s Private Investment Group.

To accomplish this, the fund looks to real estate as well as private investments such as that made in Arby’s.

Real estate investments generated profits of $350 million to the fund in 2013, as they sold into strength. Investments included office buildings, hotels and multifamily properties to even Japanese self storage facilities, which the fund exited recently at a slight loss. “We built the company after having successfully converted obsolete but well-located office buildings acquired in distressed transactions into Class A self-storage properties. Quraz became the market leader in Japanese self-storage, but we underestimated the challenges associated with starting the business in Japan. Operational mistakes along the way and lack of institutional buyers for stabilized self-storage assets led to our disappointing result. Sometimes it’s best to monetize an investment and move on.”

According to the letter “One of the largest transactions of the year was the non-recourse, cash-out refinancing of our San Francisco apartment portfolio. This transaction locked-in a high-teens internal rate of return on our investment, which will be the minimum that we can earn even if we do not receive further cash flow.”

Going forward the fund “continues to sell U.S. condominium and land holdings into an improving market,” a second appendix to the fourth quarter 2013 investment letter said. “Given low interest rates and continued turmoil and concern among investors in other parts of the world – the Middle East, Asia and Latin America – investors’ interest in real estate assets in the U.S. and Europe seems likely to grow. Without a disruption of some sort, either through higher interest rates or signs that the economic recovery is only a QE mirage, the U.S. is likely to continue to experience slowly-improving fundamentals and robust competition for opportunistic and stabilized real estate assets.”

Baupost: Arby’s contributor to private equity profitability

In a private equity deal, Baupost purchased a “significant equity stake” in Arby’s for $80 million in 2011. As of the fourth quarter of 2013, the investment has returned $165 million to the fund. “Apart from capital leases, the business was unleveraged at the time of acquisition, and our equity investment was covered by the value of real estate assets that were owned free and clear. With strong downside protection, we were well positioned to benefit from basic ‘blocking and tackling’ improvements to products and operations that significantly enhanced the financial performance of the business.”

Baupost’s public equities portfolio works well in 2013

Although valuations look lofty, Baupost’s public equity portfolio was another bright spot in 2013, with the firm producing a 45% return in 2013. Many of their gains were in well known stocks, such as American International Group Inc (NYSE:AIG), BP plc (ADR) (NYSE:BP) (LON:BP), Vivendi SA (EPA:VIV) (OTCMKTS:VIVHY), Bollore SA (EPA:BOL), while other investments were of the less traditional variety.

The fund’s two most profitable equity trades in any single year occurred in 2013, thanks to Micron Technology, Inc. (NASDAQ:MU) and ViaSat, Inc. (NASDAQ:VSAT). The fund saw significant profits from positions in Greek equities, specifically OPAP and warrants in Alpha Bank A.E. (ADR) (OTCMKTS:ALBKY) and Piraeus Bank SA (OTCMKTS:BPIRY), which stand on the shoulders of prior successful investments in Greece. Other major hedge fund players, such as John Paulson and David Einhorn, are also said to be in such plays. “We remain very optimistic about the prospect of further gains from our equity holdings, and we continued to add opportunistically to a number of our positions as prices fluctuated throughout the year.”

The letter notes one specific trade which worked out especially well, stating: “Our Greek RMBS rallied substantially as fears that the country would leave the euro dissipated. We exited more than half of this position in 2013.”

In terms of new investments in Europe, Mooney states: We “purchased a portfolio of consumer loans and a portfolio of residential mortgages in Greece, a portfolio of consumer unsecured and second-lien mortgages in the Netherlands, and a collection of residential properties in Spain.”

The most significant negative impact on the equity portfolio came from gold miners, generating a loss of nearly 1% of capital. “The combination of a 28% decline in gold prices over the course of the year and a few uncorrelated negative developments at individual companies produced a negative result. We continue to actively manage our gold positions.” Although, the letter does not specify gold miners, according to Baupost Group’s recent 13F, the hedge fund holds positions in Novacopper Inc (NYSEMKT:NCQ) (TSE:NCQ), NovaGold Resources Inc. (NYSEMKT:NG) (TSE:NG). Additionally, according to Gabriel Resources, Klarman is the 4th largest shareholder in the Canadian miner.

Baupost’s cryptic private equity deal

As Baupost exited some of its structured products, real estate and private equity stakes, it ended by discussing a new deal to purchase a division within an unnamed European company that “was a carve-out of a European company’s business unit at a significant discount to replacement cost, and at a low multiple of free cash flow,” the letter noted.

This particular division had been “negatively impacted over the past several years by corporate policy decisions, the reversal of which we expect to lead to significant earnings improvement.” The structural nature of the transaction was complex and they worked with a partner in the deal “to achieve a significant price reduction at closing, despite the strong underlying performance of the business.”

The post Baupost Group Looks to Real Estate, Greek Bank Warrants appeared first on ValueWalk.

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Wunderlich Doesn’t Like Baupost’s ViaSat Stock Pick

May 21, 2014, 8:29 am

≫ Next: Baupost Group London Real Estate Deal Clears Hurdle

≪ Previous: Baupost Group Looks to Real Estate, Greek Bank Warrants

Analyst issues sell rating, lowers price target on VSTAT

Wunderlich Securities is not a big fan of one of Seth Klarman’s biggest winning stock trades: ViaSat, Inc. (NASDAQ:VSAT). The brokerage firm lowered it’s rating to sell and issued a rating on the stock and issued a rather negative report today.

Core business model questioned

The Wunderlich report notes that recently reported earnings were below expectations but also challenged the company’s core business model. “We regard ViaSat as a leader in tackling complex digital communications challenges,” the report said. “However, the dynamics of consumer broadband increasingly appear to have shifted from the original mission of ViaSat-1, which was high-speed connectivity. Since then, volume consumer usage has evolved from niche peer- to-peer file sharing to mainstream consumers large high-definition files heading in the direction of Ultra HD.”

ViaSat, Inc. (NASDAQ:VSAT) is an innovator in space, aeronautical, maritime, and mobile communications systems for defense and commercial services. The firm is also a service provider and recently began operating the world’s highest capacity satellite for commercial broadband service, the report noted. “. ViaSat now contends with increasing market awareness of satellite service use caps (25 GB/month between 5am and midnight at the high-end).” This business challenge is the basis for Wunderlich’s sell recommendation, as they established a price target on the stock to $50, down from $53.

ViaSat by the numbers

As ViaSat, Inc. (NASDAQ:VSAT) reported earnings of $0.10 per share on revenue of $344 million, a year over year increase of 11.4%, which were within a percentage point of Wunderlich’s previous estimate. However, the earnings per share reflected increased spending on internal research and development and a courtroom drama with Space Systems/Loral was a wildcard. While most of the reported earnings were in line with expectations, the report noted that Satellite Services yielded a big surprise, residential broadband (Exede service) shifted dramatically toward direct and more focused sales efforts in F4Q14; this yielded an increase in revenue per subscriber, but a high-teens percentage decline in gross additions and half the net subscriber adds of 4Q13.“

Overall lowered revenue volume led Wunderlich to cut its estimates. The report noted that “all else being equal” it was leaning on cutting its price target on the stock even below its $50 target.

The post Wunderlich Doesn’t Like Baupost’s ViaSat Stock Pick appeared first on ValueWalk.

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Baupost Group London Real Estate Deal Clears Hurdle

May 30, 2014, 11:15 am

≫ Next: David Abrams ‘Revealed; – 2008 Talk With Seth Klarman

≪ Previous: Wunderlich Doesn’t Like Baupost’s ViaSat Stock Pick

A major real estate project backed by the famous value hedge fund Baupost Group appears to be moving ahead with an anticipated profit of over £30 pounds ($50.32 million).

Sales efforts to start in fall as phase 1 completion targeted January, 2015

In a PowerPoint presentation from Helical Bar plc (LON:HLCL), a UK real estate developer who is partnering with Seth Klarman’s Baupost on property development in Bart’s Square, London, said plans for the buildings had been approved. The bulk of development covers two office building projects that will include 215 residential apartments and 21,800 square feet of retail development next to a 202,000 square foot office complex, for a total of 19 buildings.

Helical Bar plc (LON:HLCL) owns 33 percent of the development while Baupost Group owns 66 percent. The group purchased the site, located next to London’s St Bartholomew’s Hospital, in 2011.

At the time, a timeline was set to begin work on the project in 2014 and have it complete by 2018, which appears on schedule. Work on the project could get tricky, as it is using existing historical buildings that are of “particular architectural merit.” The core architectural significance of the buildings would be maintained and in some cases development would take place behind the retained facades and other areas of architectural significance.

Phase 1 of the project is targeted for completion in January of 2015 with sales operations starting this fall and will include 94 residential units. The total value of the property when completed is estimated at £540 pounds ($905.80 million)

Blaupost’s real estate investing has been profitable

Klarman’s entry into the real estate market was noted in May of 2011 when Jim Mooney, a managing director of the Boston-based hedge fund, was dispatched to oversee commercial investments in London in the wake of the EU debt crisis. As previously noted in ValueWalk, real estate is becoming more important to the hedge fund as it has consistently generated revenue in the arena. We reported that real estate investments generated profits of $350 million to the fund in 2013, as they sold into strength. Investments included office buildings, hotels and multifamily properties to even Japanese self storage facilities

Just this past April ValueWalk reported Baupost bet big on Spanish real estate, aupost just made a more than $200 million (160 million euro) investment in Spanish commercial real estate. Baupost received seven shopping centers and a shipping and logistics park in return for its cash. GreenOak Real Estate joined Baupost as a junior partner on the deal. Baupost purchased the lot of shopping centers, most near Madrid, from the Dutch real estate group Vastned, who sold the real estate assets to raise capital to reduce their debt load.

The post Baupost Group London Real Estate Deal Clears Hurdle appeared first on ValueWalk.

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David Abrams ‘Revealed; – 2008 Talk With Seth Klarman

June 3, 2014, 7:55 am

≫ Next: David Abrams Speaks Out, Mixing Humor With Returns

≪ Previous: Baupost Group London Real Estate Deal Clears Hurdle

The Wall Street Journal’s Rob Copeland has a great story on a ‘Baupost Cub’, David Abrams of Abrams Capital. If you want to see some Baupost coverage, see our most recent article on Klarman here. Below is an excerpt from the article on Abrams followed by a transcript we found of Abrams and Klarman at an investment conference from 2008.

Any readers who have more info on this $8 billion one man shop, please send to jacob(@)valuewalk.com, will repay the favor many-fold.

…..

David Abrams, 53, would be near the top of every list of highly-paid hedge-fund managers—if anyone had known his name, until now. The veteran of Seth Klarman’s Baupost Group has built an almost $8 billion firm with virtually no external marketing, nor public speaking.

Between 2009 and 2013, one of David Abrams’ main funds returned 19% on an annualized basis, after fees—a performance better than 97% of all America’s hedge-fund managers, and nearly unprecedented for a fund of its size, according to data provider HedgeFund Intelligence.

The fund is up an additional 2% in the first quarter, investor documents indicate, helped by stakes in financial companies, an Icelandic bank and government-controlled mortgage giants Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC).

This year, the firm has also branched into real estate, buying an office building in downtown Philadelphia in what Mr. Abrams has privately said will be the first of several property acquisitions.

Some other investments have lagged. David Abrams told investors last month he had taken a write-down on his stake in Anthem Education, a for-profit college that was investigated by a Senate committee for expensive tuition, high drop-out rates and allegedly misleading recruiting tactics.

Full Wall Street Journal article here

David Abrams’ portfolio holdings via Special Situations.com

See more on David Arbams from 2008 investment conference here The_Graham_+_Dodd_Luncheon_Symposium_Transcript_20081002 via rbcpa.com

The post David Abrams ‘Revealed; – 2008 Talk With Seth Klarman appeared first on ValueWalk.

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David Abrams Speaks Out, Mixing Humor With Returns

June 3, 2014, 11:00 am

≫ Next: Baupost Nets $1Bln on Idenix Pharmaceuticals Inc (IDIX) Buyout

≪ Previous: David Abrams ‘Revealed; – 2008 Talk With Seth Klarman

Private hedge fund manager has sense of humor as his returns double that of the average hedge fund

When reclusive star hedge fund David Abrams met fellow hedge fund star Seth Klarman in 1987, he didn’t realize it would move him from New York City to Boston forever.

David Abrams wanted to stay in New York, but when Klarman said “try it for a year” Abrams was hooked

David Abrams, whose hedge fund has delivered nearly double the returns of the average for hedge fund tracked by Hedge Fund Research, was working in merger arbitrage in New York when Seth Klarman suggested the two work together in Boston. “I don’t want to leave New York City,” Abrams said to Klarman at the time. “Just try it for a year,” Klarman replied.

Twenty years later David Abrams still finds himself with a wife and two kids, still in Boston, although he owns a prime Manhattan residence with views of the park. After a successful run at Baupost, Abrams branched out on his own to form Abrams Capital Management. After leaving Klarman’s Baupost Group, one of the world’s largest hedge funds, Abrams finds himself atop the hedge fund world operating a “One-Man Wealth Machine,” a recent Wall Street Journal article by Rob Copeland.

David Abrams likes to buy on drawdowns

David Abrams, a renowned art collector, is a classic value investor who likes to “buy on drawdowns,” a term used by quantitative investors that in discretionary terms means “buying when there is blood on the street.” After the 1998 stock market crash, for instance, when he had left Baupost to establish his own fund, he said he was “on the beach when the world blew up and I said ‘wow, investing actually looks fun again so maybe it’s time to plug into Bloomberg again.’ ”

Thus Abrams started his own hedge fund. He and Klarman remain on good terms and respect one another. One area Abrams beats secretive Klarman is in regards to privacy and the size of his operation. The Journal report notes that with nearly $8 billion, Abrams employs just a handful of employees and, while earning clients an average annual return of 15%, he has become a billionaire himself. Many hedge funds of that size might employ a hundred or so employees.

David Abrams has sense of humor

While he is reclusive, Abrams is known to have a sense of humor. Speaking at a Columbia Business School event on October 2, 2008 – in the midst of the derivatives blood bath that led to the stock market swoon and recession – Abrams, speaking alongside Klarman, once said his firm was very similar to Baupost but when he went to name the fund, Baupost was taken so he settled on Abrams Capital Management. Describing his strategy to a number of hedge fund luminaries on stage and in the audience, he joked that “A lot of my best (investing) ideas were stolen from people in this room.”

David Abrams, who is on the verge of launching a forth fund with a target of $2 billion under management, likes investors who are like minded about volatility. “We care less about volatility and try and find like minded limited partners,” he said in the 2008 presentation. Abrams, like many of the top managed futures quantitative fund managers, recognizes the difference between upside and downside volatility, noting that managing clients through volatility is “a lot easier on the way up than on the way down.”

Among David Abrams current holdings is American International Group Inc (NYSE:AIG), Microsoft Corporation (NASDAQ:MSFT), The Western Union Company (NYSE:WU), Wells Fargo & Co (NYSE:WFC), SLM Corp (NASDAQ:SLM). Some of his more controversial holdings include Royal Bank of Scotland Group plc (ADR) (NYSE:RBS) (LON:RBS), J.C. Penney Company, Inc. (NYSE:JCP) and Barnes & Noble, Inc. (NYSE:BKS), as well as a position in Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) noted in the Journal that is a bet against reform of this system.

Via specsituations.com/

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Baupost Nets $1Bln on Idenix Pharmaceuticals Inc (IDIX) Buyout

June 9, 2014, 12:48 pm

≫ Next: Activist Hedge Funds Make A Major Comeback In May

≪ Previous: David Abrams Speaks Out, Mixing Humor With Returns

One of Klarman's relatively few equity positions -- Idenix -- hits a home run

Seth Klarman‘s Baupost Group LLC stands to make a bundle on Merck’s buyout of Idenix Pharmaceuticals Inc (NASDAQ:IDIX). Assuming Baupost’s more than 35% stake in the company reported on March 31st hasn’t changed, Klarman and colleagues will net close to one billion dollars based on the $24.50 acquisition price.

Overview of Baupost Group

Baupost Group, which manages $30 billion in assets, owned 53.3 million shares of the maker of hepatitis C treatments as of the end of March, making it Idenix’s largest shareholder, according to Bloomberg data. Klarman is a well-known value investor, and has profited handsomely from a number of M&A investments over the last couple of years. Since its founding in 1983, Baupost’s lead fund has returned almost 17% a year, compared to just 11% annually for the Standard & Poor’s 500 Index.

Klarman holds relatively few equities currently as he views the stock markets as overvalued. In a recent letter to investors, he wrote “on almost any metric, the U.S. equity market is historically quite expensive.” Baupost Group was holding 40% of its assets in cash of as year end 2013.

Merck and Idenix deal price “reasonable”

Deutsche Bank Market Research published a “Breaking News” investor newsletter on Merck’s acquisition of Idenix today, June 9th. In the overview of the letter, analyst Alethia Young and collegaues suggest the deal price for Idenix is reasonable. “On the valuation which is close to $4B for Idenix: we believe that if the nukes continue to look safe and are approvable in US and ROW, this valuation is reasonable.”

Idenix Pharmaceuticals Inc (NASDAQ:IDIX) has a reasonably broad future pipeline, including two promising hepatitis C candidates and screening library of nukes including IDX-437 and IDX-459, the latter just beginning P1 enrollment in Europe. The patent life of the nuclear pharmaceutical is until around 2030. The DB newsletter also highlights that Idenix has an NS5A agent (samatasvir) for Hep C that has demonstrated strong activity in combination with a Janssen agent.

In concluding the DB report, Young and colleagues also note, “These nukes are different than other historical nukes like IDX-184. There is some scarcity value to nukes since many companies are not developing them. And we believe that nukes are necessary for shorter duration curative HCV regimens.”

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Activist Hedge Funds Make A Major Comeback In May

June 12, 2014, 1:14 pm

≫ Next: Short Selling At Lowest Level Since Collapse Of Lehman

≪ Previous: Baupost Nets $1Bln on Idenix Pharmaceuticals Inc (IDIX) Buyout

Activist hedge funds generated their largest monthly return since January 2013, as conditions become favorable for M&A activity

Hedge funds had a decent time in May. During the month, all major strategies showed a positive return except for managed futures. The monthly report from eVestment found that the average return of a hedge fund was 1.23% in May, bringing up average returns for the 5-month period to 2.2%.

Activist hedge funds grab highest return since Jan 2013

Of particular note were activist hedge funds, which generated their highest gain since January of last year. The event-driven activist hedge funds followed by eVestment were up 3.92% on average in May, thus managing a 4.5% return YTD. These hedge funds caught a break in May after a run of lackluster performance in 2014. Activists had won the highest returns in 2013 as well, with names like Larry Robbins’ Glenview, Nelson Peltz’ Trian Fund Management and Dan Loeb’s Third Point adorning the best-performing list of hedge funds last year. According to eVestment, activist hedge funds are up 15% over a 12-month period and have generated the most volatile returns in 2014 across all strategies.

Credit and India-focused hedge funds in the green

Credit hedge funds have been having a great run this year as well. With treasury yields on a consistent decline, this strategy has made its ninth consecutive month of positive returns. Credit was up 1.03% in May and has gained 3.9% for the year. Meanwhile distressed funds were up by the same number in May and are now sitting on a 4.75% return for the year. The report noted that large managed futures funds gained, whereas their smaller counterparts lost in May. On a regional comparison, India-focused funds have returned an unprecedented 17.5% YTD.

Stock prices rise under activists

Over the last few weeks, a flurry of 13D filings have been made which have presented new activist stakes from hedge funds. These hedge fund managers are known to move stocks when they go long or short on a company, therefore, a sharp increase in stock price also benefits their holdings. Carl Icahn initiated the largest position in Family Dollar Stores, Inc. (NYSE:FDO), and that situation has already heated up after a poison pill response from the company. Wall Street’s other celebrity-status activist, Bill Ackman, has also been busy this year. Ackman bought a 9.7% stake in Botox-maker Allergan, Inc. (NYSE:AGN) and then proceeded to arrange a buy-out offer for the company. Allergan’s stock has gained nearly 50% this year.

Mick McGuire, an up and coming activist who nabbed a +26% return last year, filed a 13D showing a 7.2% stake in Life Time Fitness, Inc. (NYSE:LTM). McGuire’s Marcato Capital Management is known as an aggressive activist and holds a concentrated portfolio invested in a handful of companies. Seth Klarman’s Baupost Group, which has several investments in pharmaceuticals and gold, initiated another position in Keryx Biopharmaceuticals (NASDAQ:KERX). Baupost Group disclosed a 10.7% stake in the company in May.

These hedge funds have several other activist holdings which have also been doing well. The above-mentioned names offer just a glimpse into their most recent activity.

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Short Selling At Lowest Level Since Collapse Of Lehman

July 8, 2014, 1:56 pm

≫ Next: Baupost Returns Not 60% Year To Date

≪ Previous: Activist Hedge Funds Make A Major Comeback In May

Despite concerns regarding a manipulated interest rate market and asset bubbles, short selling far off highs that occurred prior to 2008 market crash

Short sellers are on the run, with the practice of betting against the stock market at its lowest level since before the financial crisis, according to a study published in the Financial Times.

Decline in short selling due to hedge funds

The decline in short selling, primarily due to hedge funds, comes as many well-known hedge funds have expressed concern regarding economic stimulus potentially building an economic foundation on sand. Recent warnings from Baupost’s Seth Klarman (although the hedge fund does not short), CQS’s Michael Hintze and David Einhorn of Greenlight Capital regarding distortions being caused by artificially low interest rates causing bubbles in some asset classes aside, the short parade seems to have subsided along with volatility. Einhorn, for instance, has termed many of the valuations in the high-flying tech stocks an official “bubble.”

But it doesn’t matter.

Short selling in the S&P 500 and FTSE all time low

Short interest among stocks in the S&P 500 (INDEXSP:.INX) index, for instance, is near two percent, the lowest level since Markit, the research firm conducting the study, began collecting the data in 2006. Short interest in the FTSE All-Share index is even lower, standing at under one percent.

The record low short interest contrasts with the year leading up to the US financial crisis. As the realization spread around Wall Street that the bank derivatives products upon which much of their balance sheets had become reliant were in fact faulty, the short interest hit 5.5 percent.

Short selling: Stock market uplifted by cheap money

Today’s stock market has been uplifted by cheap money from central banks who are eager buyers for mortgage-backed assets the banks no longer wanted as well as US debt instruments that would likely be reflecting more risk in the market if they were allowed to float freely.

But such talk of market manipulation – an illegal offense depending on the source of the manipulation – is not in style as the US Federal Reserve has indicated it may operate like a hedge fund and hold its short debt trade until maturity. Who needs marked-to-the-market accountability when you’re the Fed?

Is the low volatility market a sign of more volatility to come?

“Historically, periods of low volatility usually lead to further periods of volatility, they are not precursors to a crisis,” Antonin Jullier, global head of equity trading strategy at Citi, was quoted as saying in the article. “Hedge funds have underperformed in the first half and this means their appetite for risk has fallen over the year,” he said.

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