The easiest way to find unique, intelligent stock ideas is to follow the money. The big (and smart) money, that is. Every firm that manages over $100 million has to disclose what they own via 13-F filings. In this series, I’m examining the recent purchases of a few large investors who have demonstrated a long track record of beating the market.
Last week was Warren Buffett and Berkshire Hathaway. Today is Seth Klarman, manager of the Baupost Group hedge fund.
Why Are We Interested in Seth Klarman?
Seth Klarman is a value investor and Portfolio Manager of The Baupost Group, which now manages over $9.5 billion.  Since its inception in 1983, he has generated returns of nearly 20% per year.  He’s also the author of the book “Margin of Safety” which is no longer in publication, is extremely hard to find, and is (apparently) pretty valuable. The book sells for $750 to $1,200 on the second-hand market (maybe that’s why he likes eBay’s stock 😃).
Like many great investors, he manages a fairly concentrated portfolio. At the time of writing, his fund had about 66% of its assets in 10 holdings with 17% in one position (EBAY). 
In the most recent quarter (ending 9/30), Klarman made the following moves: 
- Pershing Square Tontine Holdings (PSTH) +4.28%
- Micron (MU) +2.65%
- Applied Materials (AMAT) +1.48%
- Healthpeak Properties (PEAK) +1.17%
- The Liberty SiriusXM Group (LSXMK) +1.05%
- Howmet Aerospace (HWM) +0.83%
- Vesper Healthcare Acquisition Corp (VSPRU) +0.44%
- Viasat, Inc. (VSAT)
- PG&E Corporation (PCG)
- HD Supply Holdings, Inc. (HDS)
- SS&C Technologies Holdings, Inc. (SSNC)
- Verint Systems Inc. (VRNT)
- eBay Inc. (EBAY)
- Fox Corporation (FOXA)
- Qorvo, Inc. (QRVO)
- HP Inc. (HPQ)
- Alphabet Inc. (GOOG)
- Facebook (FB)
- Theravance Biopharma, Inc. (TBPH)
- Colony Capital, Inc. (CLNY)
- Vista Oil & Gas, S.A.B. de C.V. (VIST)
Sold Completely Out
- AmerisourceBergen Corporation (ABC)
- Akebia Therapeutics, Inc. (AKBA)
- Ventas, Inc. (VTR)
- HCA Healthcare, Inc. (HCA)
- Univar Solutions Inc. (UNVR)
Most Interesting Stock: HD Supply (HDS)
The most interesting stock is HD Supply (HDS). What I find particularly compelling about them is how incredibly profitable they are. HD Supply shows 5-year average gross margins of 36.5% with net profits of 10.1%. Return on equity and return on invested capital is also incredible at 136% (!) and 17.5%, respectively. 
It’s shown incredible growth, as well. Revenues have grown by nearly 8.5% over the last 3 years with diluted EPS growth of 40.8%. Debt to equity is a touch high at 146%, but they are covering their interest payments nearly 6.5x, so I don’t think that leverage is an issue for their incredibly high cash flows.
HDS does not pay a dividend, but they do repurchase shares quite aggressively. Over the last 5-years, they returned an average of 4.88% to shareholders per year.  That contributed to a solid (although, not spectacular) performance. Over the last 5 years, HD returned a total of 12.39% annually compared with 13.77% for the Morningstar US Market Index. 
The enterprise value  is $9.79 billion with a 3-year median free cash flow of $570 million. In other words, if you were to buy the entire company, pay off all its debts, and payout 100% of extra cash as a dividend payment, you would earn a 5.82% annual return. That’s not bad at all, particularly in this environment of low/no interest rates.
I’m not necessarily endorsing HDS as a buy, nor am I planning to buy it myself (not yet, at least), but it does appear to be worthy of a second look to find out more about the company. The initial metrics are quite impressive.
Negative on Healthcare REIT Space: Ventas (VTR) & HCA Healthcare
Klarman eliminated exposure to both HCA Healthcare (the largest operator of acute-care hospitals in the U.S.) and a dividend investor favorite: Ventas (1,200 properties across senior housing, hospital, and skilled nursing facilities).
Ventas has seen its revenues stagnate and earnings plummet. Free cash flow has deteriorated as well, falling every year from $1.01 billion in 2017 to $870 million over the last 12 months.
Not only that, but Ventas only covers its interest payments 1.5x , which is concerning. There’s no way they can continue to be that leveraged while also maintaining their dividend payment. Earnings should increase from a COVID-related disaster in 2020. However, there are still quite a few balance sheet issues here. And it’s not like the company was firing on all cylinders before 2020. Earnings were down in 2019.
Ventas (VTR) is down 12.5% year-to-date - even including the dividend. Just because a stock falls in price doesn’t mean that it’s cheap. Despite the lower prices, Klarman doesn’t see much to like about the Healthcare REIT space. Based on these numbers, I tend to agree with him. I’d be looking to move on and find opportunities elsewhere if I already owned these in my portfolio.
Valuation Concerns with Big Tech
One other general observation from Klarman’s moves here is that he doesn’t seem to be as enthusiastic about the opportunity in some of the big tech names. His reduction to Facebook (FB) and Alphabet (GOOG) could signal some valuation concerns there. It doesn’t appear that he is too worried (considering he still owns them), but he seems to think the best days for their stocks are more behind them than in front of them at these prices.
DISCLAIMER: Dividend Growth Machine, LLC is not a registered investment advisor or broker/dealer. All information provided in this article and on the Dividend Growth Machine website is provided for informational purposes only. All opinions provided in this article are based upon sources believed to be accurate and are written in good faith, but no warranty, representation, or guarantee, whether expressed or implied, is made as to the accuracy of the information contained herein. Nothing in this article or the Dividend Growth Machine website constitutes a representation by the publisher or a solicitation for the purchase or sale of securities. Past performance is not an indicator of future performance. Please contact an investment professional if you have any questions regarding an investment.
- As of 9/30/2020. Source: WhaleWisdom.com ↩
- Seth Klarman Profile and Investing Strategy - GuruFocus.Com. https://www.gurufocus.com/guru/seth+klarman/profile. Accessed 24 Nov. 2020. ↩
- BAUPOST GROUP LLC Top 13F Holdings. https://whalewisdom.com/filer/baupost-group-llc-ma#tabholdings_tab_link. Accessed 24 Nov. 2020. ↩
- Source: BAUPOST GROUP LLC Top 13F Holdings. https://whalewisdom.com/filer/baupost-group-llc-ma#tabholdings_tab_link. Accessed 24 Nov. 2020. ↩
- HD Supply Holdings Inc (HDS) Operating Performance | Morningstar. https://www.morningstar.com/stocks/xnas/hds/performance. Accessed 24 Nov. 2020. ↩
- HD Supply Holdings Inc (HDS) Dividends | Morningstar. https://www.morningstar.com/stocks/xnas/hds/dividends. Accessed 24 Nov. 2020. ↩
- HD Supply Holdings Inc (HDS) Trailing Returns | Morningstar. https://www.morningstar.com/stocks/xnas/hds/trailing-returns. Accessed 24 Nov. 2020. ↩
- long-term debt + equity ↩
- Ventas Inc (VTR) Financials | Morningstar. https://www.morningstar.com/stocks/xnys/vtr/financials. Accessed 24 Nov. 2020. ↩
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