It is always interesting to take a look at what Seth Klarman (Trades, Portfolio), one of the most respected value investors alive today, has been buying for his portfolio.
Baupost's 13F filings, which have to be filed with the Securities and Exchange Commission within 45 days after the end of each calendar quarter, give us a great snapshot into where he is finding value in the current market.
That being said, while these documents give us a great insight into where the value investor is investing his money, it should be clarified that these are backward-looking documents and only reflect the equity part of the portfolio. They do not tell us where he is investing in credit or in the private markets, and they do not reveal how much cash Baupost is currently holding.
Still, 13Fs do give us insight into the undervalued stocks Klarman is buying -- which is arguably the most exciting part.
The largest holding
Continuing a trend that has been going on for some time, Baupost's most substantial buying activity was Twenty-First Century Fox (FOXA, Financial). During the quarter, Klarman upped his holding of this stock by 32%. It now accounts for 19% of his equity portfolio. The overall holding is worth a total of $2.5 billion.
This seems to be nothing more than a simple merger arbitrage play. Disney (DIS, Financial) is currently in the process of acquiring the assets of Fox for $71.3 billion. The deal is still going through the various stages of approval around the world, but the fact that Klarman is willing to put so much of his money into this one trade, betting on the deal being approved, shows he believes it is going to complete without a hitch.
Klarman has never been afraid to invest a large percentage of the portfolio in a single stock if he believes the risk-reward profile is attractive enough. Waiting for the perfect opportunity and then acting with conviction is his most impressive trait. It seems he is making the most of the opportunity the Fox-Disney merger presents. The deal has limited downside and a guaranteed upside potential.
Fire risk
The next most significant acquisition in the third quarter was PG&E Corp. (PCG, Financial). This deal has been covered a lot because the utility provider may be responsible for the Camp Fire in California, the worst in the state's history, which has killed nearly 100 people and left thousands homeless. It'll be interesting to see if the company is still in his portfolio at the end of the fourth quarter.
Going down the list, one of the smallest additions to the portfolio in the third quarter was Univar Inc. (UNVR, Financial). This was a new buy for Klarman. He acquired 1.8 million shares, worth a total of $54 million. Compared to the overall size of the equity portfolio ($12.7 billion) and Baupost's total assets under management ($30 billion), this position is almost insignificant. Nonetheless, it is still interesting because it attracted Klarman's attention.
There's not enough room to go into the company in detail here, but to give a brief overview, it is a global chemical and ingredient distributor and provider of value-added services. It trades at a forward price-earnings ratio of 12 and price-book of 2.6. It has steadily grown book value per share at a compound annual growth rate of 15% for the last five years.
Turnaround
Another small holding first acquired in the third quarter is YPF S.A. (YPF, Financial), Argentina's flagship oil and gas company.
The company has a checkered past, but it now looks as if the business is making a comeback. Recently, management declared that over the next three years, as investments in growth pay off, the group will double its dividend every year and also double its electricity generation capacity.
Further, the company is looking to significantly boost oil and gas production, investing between $4 billion and $5 billion per year through 2022. It seems Klarman is investing in this business as a growth play as it recovers from past mistakes.
Disclosure: The author owns no stocks mentioned.
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